Illiquidity Definition – What is Illiquidity? (2024)

FAQs

Illiquidity Definition – What is Illiquidity? ›

Illiquidity is the opposite of liquidity. Illiquidity occurs when a security or other asset that cannot easily and quickly be sold or exchanged for cash without a substantial loss in value.

In the investment world, illiquidity refers to assets which can't be exchanged for cash easily. This might be because there aren't enough investors willing to buy them. In business, the term can describe a company that doesn't have enough cash to meet its debt obligations.

Illiquidity: the financial state where a business's current assets or sufficient resources cannot satisfy its current liabilities, without having to resort to the disposal of its long-term assets or non-current assets (e.g., fixed assets, long term investments)

Liquidity refers to the ease with which an asset can be converted into another asset like cash without affecting its market price. “Illiquidity” in essence occurs when an asset cannot be traded or sold with ease and without incurring a loss in value relative to its “fair market” value.

At the root of a liquidity crisis are widespread maturity mismatching among banks and other businesses and a resulting lack of cash and other liquid assets when they are needed. Liquidity crises can be triggered by large, negative economic shocks or by normal cyclical changes in the economy.

Illiquid refers to the state of a stock, bond, or other assets that cannot easily and readily be sold or exchanged for cash without a substantial loss in value.

Illiquid options cannot be easily or quickly sold or converted to cash. Liquidity refers to how easy it is to sell an asset for cash at prevailing market prices. Illiquid options have very low or no open interest and therefore may be best held until expiration.

An illiquid investment is an investment that the fund reasonably expects cannot be sold in current market conditions in seven calendar days without significantly changing the market value of the investment.

Real estate, on the other hand, is considered an illiquid investment, meaning money invested in this asset class is usually tied up for a considerable period of time.

Real estate is considered an illiquid asset because the process of buying and selling properties can take much longer compared to financial assets like stocks and bonds.

Which assets are illiquid? ›

An illiquid or non-liquid asset is one that you can't sell easily. Real estate, works of art and antiques can be difficult to sell for many reasons: often it's not easy to find a buyer, the asset is very expensive or the process of selling the asset can take a long time.

Illiquid stock is stock that cannot be sold for cash easily because it is not traded on a public market or in demand by other private investors.

Among the given options, bonds are typically the most illiquid investment because they often have fixed maturity dates where the investor must hold the bond until maturity to receive the principal along with periodic interest payments.

These are assets that cannot be quickly sold, that are difficult to sell or that cannot be sold without incurring a significant loss in value. The most common example of an illiquid asset is real estate. While a piece of land has significant value, converting that value into cash through a sale takes time.

Gold is a highly liquid asset, which is no one's liability, carries no credit risk, and is scarce, historically preserving its value over time. It also benefits from diverse sources of demand: as an investment, a reserve asset, gold jewellery, and a technology component.