Liquidity risk definition
Liquidity risk is a type of market risk. It refers to a situation where buyers and sellers are unable to find matching orders to take the other side of their trades. When this happens, buyers may have to increase the price they are happy to pay and sellers may have to reduce their asking price in order to break the stalemate.
Assets are often categorised according to their levels of liquidity risk. For example, gold is generally considered a highly liquid product, so it normally sees large volumes of buyers and sellers. Lean hogs, on the other hand, can be a fairly illiquid market and therefore more risky.
If you invest in long-term assets, it’s important to consider how easily you might be able to sell them in the future. Assets that are difficult to sell in an illiquid market carry a high liquidity risk, thus you may not be able to convert them into cash quickly at a time of need. Liquidity risk may lower the value of certain assets due to the increased potential for capital loss.