Traders' Roundtable

After reading about some posts and articles about utilizing dollar volume to focus on more liquid stocks, I still don't quite grasp the significance of avg dollar volume vs plain avg volume.

I am assuming/thinking:
traders who worry about liquidity usually refer to the ability to in/out without excessive slippage and in a timely manner. It seems volume satisfies this requirement sufficiently.

stock XYZ's avg price = 20, avg vol = 1,000,000. thus avg dollar volume = 20,000,000
-if you wanted to ALLOCATE $1,000 per trade math dictates that you will end up with the same %.

$1,000 / 20,000,000 $vol = 1/20,000.

$1,000 / $20 per share = 50 shares. 50 shares / 1,000,000 avg vol = 1/20,000.

so overall i don't see the importance of dollar volume, am I overlooking something simple?...any help is appreciated.

Maybe these posts and articles are addressing how to filter out (discard) trades in illiquid stocks or lower-than-average-liquidity stocks. Maybe they are claiming that (average daily volume in dollars) is a better way to measure liquidity, than (average daily volume in shares). It's an idea that makes pretty good sense to me. For example,

• Stock A has an average daily volume of 1 million shares. Its current price is five dollars per share
  
  Stock B has an average daily volume of 1 million shares. Its current price is eighty-two dollars per share

Which stock is more liquid, A or B? Their (average daily volume in shares) numbers are equal. But their (average daily volume in dollars) are not.

i understand your example, but given that more dollars exchanged hands doesn't mean that the specific commodity/stock itself had been purchased/sold more times. Isn't the interest/volume in the stock the basis for liquidity? It seems that using dollar-volume just dilutes the meaning of liquidity itself.

Your example makes sense to me with the following assumption: higher dollar volume equates to higher potential volume. I don't think I can fully agree with that statement no matter how "sound" it seems.

Opposite example:

Stock A has avg daily volume of 10 million with price of $100.

Stock B has avg daily volume of 500 million with price of $2.

"Sense wise": can Stock A have the same liquidty as Stock B?

Thanks for the help.

I treat liquidity calculations as a way of normalizing data so subjects are measured/evaluated from a common reference - in this case $.

scrubolio wrote: Isn't the interest/volume in the stock the basis for liquidity?

Not when you determine how many shares you will be trading based on the dollar amount of your account. You are trading dollar liquidity based on the dollars in your portfolio not volume liquidity. Volume based on the size of the potential trade may just be an extra filter.
You want to have as little effect as possible, and if you have to trade a much larger percentage of the volume in a small dollar stock to get the same risk/heat, then you will have a greater effect on the movement of the stock.
Plus for small dollar stocks, the bid ask spread becomes a much greater percentage of the spread and slippage.
Its always interesting here in Australia as we have a lot of large market cap stocks with low share prices.... its just that way