Market liquidity is the most important consideration when looking at a stock for an intraday trading. It is the sense of comfort that you get when trading intraday. After all, you do not want to enter into a position and they worry about how you are going to exit the same. That is an unnecessary risk that you are taking on at a time when there are enough genuine risks to worry about. The problem of liquidity is more pronounced in smaller stocks and in stocks that are not widely owned. This problem normally exists in small stocks and more of the F&O stocks and the higher end of midcap stocks are normally quite liquid. But how do you measure liquidity?
One of the basic measures of liquidity is to view daily volumes as a proportion of market capitalization. Ideally, you can take average daily volumes to get rid of any short-term biases or extreme volumes on specific days. The formula is as under:
Liquidity = Average daily volumes / Market capitalization
While there are no hard and fast rules, a minimum liquidity ratio of 10% should be the benchmark to consider a stock for intraday trading. That means if the market cap of the stock is Rs.1000 crore then the stock should at least see volumes of Rs.10 crore on an average per day. These are just cash market volumes and futures and options volumes are not included. Also, these volumes refer to a mix of intraday volumes and delivery volumes on an average day.