The Hidden Cost of Low Liquidity on the Nigerian Stock Exchange

Low liquidity does not announce itself. It does not crash prices overnight. It works slowly, through poor execution, missed exits, and false signals. Many investors only notice it after returns fall short of expectations.

In simple terms, Liquidity is the ease with which you can buy or sell a stock without pushing its price too much. A liquid stock trades often. Buyers and sellers sit close together. Orders fill quickly. A stock can look active on the screen and still be illiquid. Price movement alone does not mean liquidity. Volume and depth matter more.

On the Nigerian Exchange Limited, liquidity is uneven. A small group of stocks accounts for most daily traded value. Many listed stocks trade only in short bursts, then go quiet again.

Where Low Liquidity Shows Up on the NGX

The structure of the NGX makes liquidity risk easy to miss. Some stocks trade every day with steady volume. Others may trade today, disappear for days, then reappear in a headline.

When liquidity is thin, prices become fragile. Small orders move prices more than they should. Large orders struggle to execute without impact.

This fragility creates costs that never appear as line items on account statements, but still reduce returns.

In low-liquidity stocks, the gap between the buying and selling prices is often wide. That gap is a real cost. You pay it the moment you trade. You can buy a stock and lose money instantly, even if the market price does not move against you. Over time, repeated spread costs erode returns, especially for investors who adjust their positions or add gradually. In liquid stocks, spreads stay tight. In illiquid stocks, spreads punish patience.

The First Hidden Cost: Slippage

Slippage happens when your order fills at a worse price than expected. In thin markets, this happens often.

You plan to buy at one level, but sellers disappear. You end up paying more. You try to sell, but buyers sit lower than expected. You accept a worse price to exit. This is not manipulation. It is a lack of depth.

For long-term investors, slippage hurts most during exits. Liquidity tends to vanish when many people want to sell at the same time.

The Second Hidden Cost: False Signals

Low liquidity distorts information. In thinly traded stocks, price moves often reflect who traded, not what changed. A single order can trigger a sharp rise or drop that looks meaningful. Retail investors react. They chase moves that have no support. They panic during drops that lack real selling pressure.

Many long-term investors believe liquidity only matters to traders. This belief causes problems later. You can hold a stock for years, watch it rise on paper, and still struggle to exit when you need to. When liquidity disappears, time does not help. It delays the problem until the moment it matters most.

Institutional investors think about liquidity first. They avoid stocks they cannot enter or exit calmly. Liquidity defines what they can own. This behaviour shapes the market. Liquid stocks attract steady capital. Illiquid stocks struggle to hold attention. Valuation gaps persist. Rallies fade when volume dries up.

How Retail Investors Should Respond

Retail investors should treat liquidity as a core factor, not an afterthought. Focus on stocks with consistent traded value. Ignore price moves that appear without volume support.

Avoid building positions that would feel stressful to unwind. If selling already feels difficult in theory, it will feel worse in practice. Liquidity does not guarantee profits. It gives your decisions room to work.

Low liquidity rarely causes dramatic losses. It causes something harder to notice: steady underperformance.

On the NGX, returns depend on more than picking good businesses. They depend on choosing stocks the market can absorb. The cost you do not see often costs the most.