Illiquid

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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.

BREAKING DOWN '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.

Illiquidity in business refers to a company who does not have the cash flow necessary to make its required debt payments, though it does not mean the company is without assets. Capital assets, including real estate and production equipment, often have value, but are not easily sold when cash is required. These items are not sold as part of the company’s core business, and generally include any property owned by the company that is outside of the products produced for sale.

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.

On the other end of the spectrum, most listed securities traded at major exchanges, such as stocks, funds, bonds and commodities are very liquid, and can be sold instantaneously during regular market hours at fair market price. Additionally, precious metals, such as gold and silver, are often fairly liquid.

An asset's liquidity may change over time, depending on outside market influences. This is especially true for collectibles, as an item's popularity in the consumer market may fluctuate dramatically, leading to highly volatile pricing.

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.