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.
|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 ExpensesBusiness RiskCredit Risk|
This is the complete list of articles we have written about thinking.
If you enjoyed this page, please consider bookmarking Simplicable.
© 2010-2023 Simplicable. All Rights Reserved. Reproduction of materials found on this site, in any form, without explicit permission is prohibited.
View credits & copyrights or citation information for this page.