Stock Jobs Stock Market Liquidity 3 — Questions and Answers
Question 1: Market depth refers to what?
- The volume of orders available at various price levels (Correct answer)
- The total number of listed companies
- The age of the exchange
- The number of analysts covering a stock
Correct answer: The volume of orders available at various price levels
Market depth shows how many shares can be traded at each price before moving the market.
Question 2: A large order that pushes a stock's price significantly is said to have caused what?
- Market impact (Correct answer)
- A stock split
- A dividend cut
- An IPO
Correct answer: Market impact
Market impact is the adverse price movement caused by executing a large trade.
Question 3: Which type of order tends to provide liquidity rather than consume it?
- A limit order resting in the book (Correct answer)
- A market order
- A stop-loss triggered at market
- A fill-or-kill market order
Correct answer: A limit order resting in the book
Resting limit orders add depth to the order book, supplying liquidity for others.
Question 4: Liquidity tends to be highest during which part of the U.S. trading day?
- The open and the close (Correct answer)
- Midday lunch hours only
- Overnight sessions
- Weekends
Correct answer: The open and the close
Trading volume and liquidity typically peak near the market open and close.
Question 5: An ETF's liquidity is influenced not only by its own volume but also by what?
- The liquidity of its underlying holdings (Correct answer)
- Its ticker length
- The fund manager's age
- The number of share classes
Correct answer: The liquidity of its underlying holdings
ETFs can be created or redeemed using underlying assets, so their liquidity reflects those holdings.
Question 6: Which scenario best illustrates 'slippage'?
- An order fills at a worse price than expected due to thin liquidity (Correct answer)
- A dividend is paid late
- A stock is delisted
- A company restates earnings
Correct answer: An order fills at a worse price than expected due to thin liquidity
Slippage is the difference between the expected execution price and the actual fill price.
Question 7: Why is liquidity considered a form of risk for investors?
- You may be unable to sell at a fair price when you need to (Correct answer)
- It guarantees losses
- It eliminates volatility
- It fixes the share price permanently
Correct answer: You may be unable to sell at a fair price when you need to
Liquidity risk is the danger of not being able to exit a position quickly without a loss.
