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Illiquid

What does 'Illiquid' mean

Illiquid refers to the state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets may also be hard to sell quickly because of a lack of ready and willing investors or speculators to purchase the asset. Additionally, a company may be deemed illiquid if it is unable to obtain the cash necessary to meet debt obligations.

Explaining 'Illiquid'

In regards to illiquid assets, the lack of ready buyers also leads to larger discrepancies between the asking price, set by the seller, and the bidding price, submitted by the buyer, than would be found in an orderly market with daily trading activity. This can cause holders of illiquid assets to experience losses, especially when the investor is looking to sell quickly.

Examples of Illiquid and Liquid Assets

Some examples of inherently illiquid assets include houses, cars, antiques, private company interests and some types of debt instruments. Certain collectibles and art pieces may be considered illiquid assets as well. Though these items may have inherent value, the marketplace in which they are sold often has few buyers in comparison to those interested in the purchase of more liquid assets.

Illiquidity and Risk

Illiquid securities carry higher risks than liquid ones, which becomes especially true during times of market turmoil when the ratio of buyers to sellers may be thrown out of balance. During these times, holders of illiquid securities may find themselves unable to unload them at all, or unable to do so without losing a lot of money.

Illiquid FAQ

What are liquid and illiquid assets?

Liquid assets are assets such as cash or other properties that can be easily and readily converted to cash without any significant loss in value. While illiquid assets which are also called fixed assets are assets that are held long-term, and as such not readily convertible to cash such as a home, land, or equipment.

Is real estate illiquid?

Illiquid assets include real estate, cars, antiques, private company interests, and similar types of debt instruments.

Is an illiquid security?

When investors buy into a company's illiquid securities, it simply means that at no point in time can the securities bought be sold for cash when the investors want out, not even at a loss.

What is illiquid contract?

An illiquid contract is an agreement that cannot be readily sold or exchanged for cash at the dominant market cost. Along these lines, holders of these options will be unable to discard them at a reasonable price on the market and might be compelled to wait on the tenure of the contract agreement.

What does illiquidity mean?

Illiquidity is the opposite of liquidity. Illiquidity occurs when assets such as cash or other properties can be easily and readily converted to cash without any significant loss in value.

What is an illiquid investment?

Illiquid alludes to the condition of a stock, bond, or different assets that can only with significant effort and promptly be sold or traded for money without a considerable loss in value. Illiquid resources will, in general, have more extensive offer ask spreads, more unpredictability, and, thus, the higher danger for investors

What is the most illiquid investment?

The most illiquid investments are probably hedge funds, real estate, private equity, and infrastructure.

Further Reading


Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises
www.worldscientific.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Illiquidity and all its friendsIlliquidity and all its friends
www.aeaweb.org [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Illiquidity, consumer durable expenditure, and monetary policyIlliquidity, consumer durable expenditure, and monetary policy
www.jstor.org [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Systemic illiquidity in the federal funds marketSystemic illiquidity in the federal funds market
pubs.aeaweb.org [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Illiquidity and stock returns: cross-section and time-series effectsIlliquidity and stock returns: cross-section and time-series effects
www.sciencedirect.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? Or is it the result of attempting to securitize illiquid noncommercial mortgage …Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? Or is it the result of attempting to securitize illiquid noncommercial mortgage …
www.tandfonline.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

What hinders investment in the aftermath of financial crises: Insolvent firms or illiquid banks?What hinders investment in the aftermath of financial crises: Insolvent firms or illiquid banks?
www.mitpressjournals.org [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Dollar illiquidity and central bank swap arrangements during the global financial crisisDollar illiquidity and central bank swap arrangements during the global financial crisis
www.sciencedirect.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Is financial fragility a matter of illiquidity? An appraisal for Italian householdsIs financial fragility a matter of illiquidity? An appraisal for Italian households
onlinelibrary.wiley.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …

Fear of fire sales, illiquidity seeking, and credit freezesFear of fire sales, illiquidity seeking, and credit freezes
academic.oup.com [PDF]
… This chapter was originally published under the same title in “Journal of Financial Economics”, 105, pp … For all these reasons, the gap in pricing between liquid and illiquid bonds, that are … that in periods of financial crisis, all bond prices decline due to an increase of illiquidity …



Q&A About Illiquid


What is an illiquid asset?

An illiquid asset is a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value.

How does an economy's level of development affect its level of liquidity?

An economy's level of development affects its level of liquidity by increasing the number and diversity of participants in the market place. This increases the overall liquidity in that market place.

Are all illiquid assets inherently valuable?

No, not all illiquid assets are inherently valuable.

Are there any other ways to determine if something is liquid or not besides looking at its liquidity ratio?

Yes, you could look at price volatility as well as trading volume . If something trades frequently then it's likely that investors see value in it and therefore would consider it more liquid

What are some examples of liquid markets?

Some examples of liquid markets include stocks, bonds, and currency.

Is there a market for these items?

Yes, but it has few buyers in comparison to those interested in the purchase of more liquid assets.

What are some examples of inherently illiquid assets?

Some examples of inherently illiquid assets include houses, cars, antiques and private company interests.

How do you know if an investment is liquid or not?

You can tell if an investment is liquid by looking at its liquidity ratio which measures how quickly it can be converted into cash without losing value. The higher the ratio number the more liquid the investment and vice versa. For example, Treasury bills have a liquidity ratio of 100% while real estate investments have ratios closer to 10%. A stock with a high liquidity ratio will generally trade on major exchanges like NYSE or NASDAQ whereas one with low liquidity will only trade over-the-counter (OTC). This means that stocks with high ratios tend to have lower risk than those with low ratios because they can usually find buyers when they need them most during times of market turmoil.""

What types of debt instruments may also be considered to be illiquid?

Certain collectibles and art pieces may also be considered to be illiquid.

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