Illiquidity

Illiquidity refers to the condition of an asset or security that cannot be quickly sold or exchanged for cash without a substantial loss in value. This often occurs in markets with low trading volumes, in which buyers are scarce, and sellers abound. illiquidity can increase risks for investors, making it challenging to navigate financial systems and affecting overall market efficiency.

Illiquidity meaning with examples

• During times of economic uncertainty, many investors face illiquidity as they find it difficult to sell their assets. This situation can force them to settle for much lower prices than they originally anticipated, impacting their overall returns and financial stability significantly.
• An illiquid market often signifies higher risk, as investors may be unable to convert their assets into cash swiftly. For instance, real estate investments can be particularly illiquid, as selling property may take months or even years, depending on market conditions.
• A company looking to raise capital found itself facing illiquidity after its primary investors withdrew their support. This resulted in an inability to access funds readily, forcing the company to seek alternative financing methods or restructuring.
• Banking institutions carefully assess the illiquidity of their asset portfolios. When assets become illiquid, it can affect their overall balance sheets and financial health, prompting them to adjust their risk management strategies accordingly.
• Investors often diversify their portfolios to mitigate the risks associated with illiquidity. By including both liquid and illiquid assets, they aim to achieve a balance that provides potential returns while still allowing for liquidity when needed.