What is Liquidity Risk?

Liquidity risk is the chance that a given security or asset cannot be traded quickly enough in its market to prevent a loss.

Many businesses rely on a market of buyer and sellers to exchange securities and assets. If you own an asset and the buyers in a market suddenly disappear you may have to sell that asset at a deep discount to interest a buyer. In some cases, it may not be possible to attract buyers meaning that the value in the asset is essentially frozen.

Different markets have different levels of liquidity. A major currency such as the US dollar is considered the most liquid of all assets. The stocks of large companies with a high average trading volume on major stock exchanges may also be considered reasonably liquid.

Other markets offer low liquidity and it may take months or years to attract a buyer. One such market is the real estate market.

Liquidity changes with market conditions and a liquid security or asset can suddenly become illiquid. For example, the liquidity of risky assets may drop in the event of a market panic. Minor changes in liquidity are a common feature of markets. For example, the real estate market in some locations may be slow in the winter.

Overview: Liquidity Risk
Type	Risk
Definition (1)	The risk of running out of cash when you need it to pay for expenses and to meet the terms of agreements with creditors.
Definition (2)	The risk that an asset can not be sold quickly and efficiently.
Related Concepts	Business Expenses Business Risk Credit Risk