Liquidity is an important requirement when it comes to trading financial securities. In highly liquid conditions, there is an abundance of buyers and sellers. As such, orders get filled easily. It would be very easy for a trader to enter and exit a trade if a security is liquid.
One way to gauge liquidity is to make a visit to the exchange. If the trading pits are filled with disorder, that means that the security is being traded actively. Hence, we say that the security is liquid. If a trading pit is quiet and dull, it means that the security in question is not liquid.
One other way to gauge liquidity check the volume traded in a particular security in any given trading session. If the average volume for a security is at least 300,000 shares a day, that means that the stock is fairly liquid. Of course, if a security trades at a volume of 1 million shares a day, that is even better for traders. The more liquid a security is, the easier it is for orders to be filled.