Why We Built This
Most investing conversations focus on buying.
- What to buy
- When to buy
- What looks cheap
But investing does not end at buying. At some point, every investor wants the option to sell, rebalance, or adjust their portfolio. This is where liquidity becomes relevant.
At Cowrywise, we did not want investors to discover liquidity only when it becomes a problem. We wanted investors to see it clearly, early, and in a way that relates directly to their money, not abstract market statistics.
This perspective led us to build the “Liquidity Ratio”
The Problem We Wanted to Solve
Liquidity is often assumed rather than measured.
“A stock trades daily, so it must be liquid”
But in reality, liquidity is uneven. Some stocks can absorb large amounts of money easily. Others cannot.
Investors typically realise this when:
- Selling takes longer than expected
- Prices move sharply on small trades
- Bids disappear entirely
By then, options are limited.
We wanted to make this risk visible before that point.
What Liquidity Really Means
We define liquidity simply as “how easily money can move in and out of an investment without stress”.
The Two Things That Drive Liquidity
To keep things practical, our Liquidity Ratio is built on two inputs
Activity: How much money trades
This is the foundation. We measure activity as the average daily traded value of a stock. That is, how much money flows through it on a typical trading day.
Average Daily Traded Value = Average Daily Volume X Average Price
We deliberately use value, not volume.
Volume alone can be misleading. A stock trading 10 million shares a day at ₦2 is very different from one trading 1 million shares at ₦100. Liquidity is about how much money the market can absorb daily.
This is why activity carries 90% of the weight in our framework. If money is not consistently moving through a stock, liquidity is limited.
Turnover: How widely shares circulate
Activity alone does not tell the full story.
Some stocks trade at large values because the same shares move repeatedly. Others trade similar values across a broader group of investors.
Turnover Ratio = Total Shares Traded over a Period/ Free Float Shares
Turnover adds context to activity by measuring how frequently the available shares are traded.
Why does this matter?
Two stocks can have similar traded values, but very different structures:
- One might have a tight free float with the same shares recycling daily
- Another may have broad participation across its shareholder base
Turnover helps us adjust for these differences. However, it plays a supporting role, not a leading one. That is why it carries 10% weight, not more.
The Liquidity Ratio
For each listed stock, we compute its activity and turnover scores, apply the 90%/10% weighting, and rank stocks by quintile across the market.
This approach:
- Reduces distortion from extreme outliers
- Allows fair comparison across sectors
- Creates a stable, repeatable classification
At a glance, investors can see whether a stock sits in the most liquid segment of the market, a tradable middle zone, or the lower-liquidity tail where execution risk is high.
Why This Matters for Retail Investors
Retail investors are the most exposed to liquidity risk, often without realising it. Many portfolios look diversified on paper but are concentrated in stocks with thin trading or limited free float.
In such cases, entry is easy, returns look good on screen, but exits become difficult precisely when they matter most.
Closing Thoughts: Liquidity as a Portfolio Risk, not a Stock Feature
One important shift in our thinking is this: “Liquidity is not just a property of a stock; it is a portfolio-level risk.
Two investors can hold the same stock: one in a small position, the other in a large allocation. Their liquidity reality is not the same.
This is why this Liquidity Ratio framework is not meant to exist in isolation. It is designed to sit alongside diversification analysis and long-term portfolio construction.
