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Illiquidity

Illiquidity refers to the state of a market or asset where there is a lack of buyers or sellers, making it difficult to convert the asset into cash quickly without a substantial loss in value. Illiquidity is often associated with assets like real estate, certain types of bonds, or private equity, where transactions are infrequent. Illiquidity risk is the risk that an investor will not be able to sell an asset promptly or without incurring a significant discount.

Example

A bond with low trading volume may be illiquid, meaning that if the bondholder needs to sell quickly, they might have to accept a lower price due to limited demand.

Key points

• Refers to the difficulty of selling assets quickly without a price reduction.

• Common in assets like real estate, private equity, or certain bonds.

• Illiquidity risk involves the possibility of not being able to sell at the desired time or price.

Quick Answers to Curious Questions

Illiquidity can prevent investors from selling assets quickly when needed, leading to potential losses if they must sell at a discount.

Real estate, private equity, collectibles, and certain bonds with low trading volumes are often considered illiquid assets.

Investors manage this risk by maintaining a balanced portfolio with a mix of liquid and illiquid assets, allowing for flexibility in times of financial need.