Flight To Liquidity

DEFINITION of 'Flight To Liquidity'

A situation where investors attempt to liquidate positions in inactive or illiquid assets and purchase positions in more liquid assets. A flight to liquidity would typically take place during times of economic or market uncertainty, as investors fear that the markets may tumble they choose to seek positions in more liquid securities in order to increase their abilities to sell their positions in the case where they wish to leave the market.

BREAKING DOWN 'Flight To Liquidity'

During a flight to liquidity, investors view illiquid assets as uncertain and those illiquid assets will typically fall in their implied value due to discounts for a lack of liquidity. Investors then enter into positions in more liquid assets, such as treasuries or blue-chip stocks in order to gain flexibility and limit their overall portfolio risk. Flights to liquidity are not uncommon and may occur on a small scale on a day-to-day basis.

RELATED TERMS
  1. Liquid Market

    A market with many bid and ask offers, low spreads and low volatility. ...
  2. Liquidity

    The degree to which an asset or security can be quickly bought ...
  3. Dollar Volume Liquidity

    A stock or exchange-traded fund's share price times its average ...
  4. Liquidating Market

    A type of securities market in which there is broad-based selling ...
  5. Liquid Asset

    An asset that can be converted into cash quickly and with minimal ...
  6. Voluntary Liquidation

    A corporate liquidation that has been approved by the shareholders ...
Related Articles
  1. Investing Basics

    Understanding Liquidity Risk

    Learn about the two types of liquidity risk: funding liquidity risk and market liquidity risk.
  2. Term

    What is Liquidity Risk?

    Liquidity risk is the risk of being unable to sell an asset fast enough to avoid loss.
  3. Options & Futures

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  4. Markets

    What Is The Quick Ratio?

    Find out about this liquidity indicator and how it's used.
  5. Investing Basics

    Liquid & Illiquid Assets

    The easier it is to convert the asset, the more liquid the asset is considered.
  6. Investing

    Why Liquidity Matters in the Corporate Bond Market

    Professional analysis and constant monitoring of liquidity risk when investing in corporate bonds is highly important.
  7. Economics

    What Does Liquidation Mean?

    Creditors liquidate assets to try and get as much of the money owed to them as possible.
  8. Mutual Funds & ETFs

    Vanguard ETFs: 6 Thoughts on Fixed Income ETF Liquidity

    Find out whether concerns over rising interest rates and their impact on the liquidity of fixed-income exchange-traded funds are warranted.
  9. Fundamental Analysis

    Investing Basics: Flight To Quality

    At times of market stress, investors flee from risky assets to investments the safest ones available.
  10. Investing Basics

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
RELATED FAQS
  1. What is the difference between a bank's liquidity and its liquid assets?

    Understand the relationship between a bank's liquid assets and its liquidity and how the financial crisis demonstrated the ... Read Answer >>
  2. Is liquidity calculated by flow?

    Read about the differences between economic liquidity, financial liquidity and asset liquidity and how each respective type ... Read Answer >>
  3. What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity ... Read Answer >>
  4. What is the impact of inflation on liquid assets?

    Find out why inflation is particularly problematic for liquid assets, and learn what holders of liquid assets can do when ... Read Answer >>
  5. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
  6. How much liquidity is considered too much liquidity?

    Learn about the risks of holding too much cash or investing in assets that are too liquid, and discover how liquidity is ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center