Liquidity Risk

Liquidity risk means the risk that an asset cannot be sold quickly without a large loss in value. In simple terms, liquidity risk is the danger of not being able to turn something into cash when needed. Liquidity risk is important because markets can become unstable when investors cannot easily sell assets or raise cash. It can affect funds, bonds, real estate, and smaller or less-traded securities. For example, if many investors try to sell a rarely traded bond at the same time, the price may fall sharply because of liquidity risk. Liquidity risk is not the same as market risk. Market risk is about prices moving, while liquidity risk is about the ability to trade or sell without a major discount.