The easiest way to define ‘liquidity risk’ is risk that arises from the difficulty of selling an asset.
An investment may sometimes need to be sold quickly. The reasons can be different for individuals and different for an investment manager.
Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset. And in a market with very high transparency and poor liquidity the problem is increased – like a set of brokers who know you are trying to sell a house.
Some assets are highly liquid and have low liquidity risk (such as shares of a listed A group company), while other assets are highly illiquid and have high liquidity risk (such as a house).
A humorous definition of liquidity is – the moisture in your eyes when you look at your portfolio!
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