What does it mean when a stock is described as "highly liquid"?

When a stock is described as "highly liquid," it means that the stock can be easily bought or sold without causing substantial changes in its price. Liquid stocks have a high level of trading volume, which facilitates the execution of large orders with minimal slippage; that is, the execution price remains close to the expected price. This characteristic is particularly important for traders and investors who may wish to enter or exit positions efficiently.

High liquidity implies that there are many buyers and sellers in the market for that stock, making it easier to execute trades quickly. Additionally, high liquidity can indicate that the stock is somewhat stable, as transactions are more evenly distributed across a wide range of participants, reducing the likelihood of extreme volatility.

The other options might seem relevant but do not accurately define liquidity. Market capitalization represents the total value of a company's outstanding shares and does not directly relate to the ease of trading a stock. A high dividend yield pertains to the return on investment from dividends and does not indicate trading ease. Lastly, describing a stock as undervalued is a subjective assessment of its market price relative to its intrinsic value, rather than a measure of how quickly it can be traded.