Volume Risk
Volume risk refers to the uncertainty surrounding the amount of trading activity or liquidity available in the market for a particular asset. It occurs when an asset's trading volume is insufficient to allow for smooth buying or selling without significantly affecting the price. Volume risk can lead to difficulties in executing large orders and may cause price slippage, particularly in illiquid markets or during times of low trading activity.
Example
An investor trying to sell a large block of shares in a small-cap stock faces volume risk because low trading activity may cause the price to drop sharply during the sale.
Key points
• The risk of insufficient trading volume or liquidity affecting the execution of trades.
• Can lead to price slippage or difficulties in executing large orders.
• More prevalent in illiquid markets or during periods of low trading activity.
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