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Illiquid

Reviewed by Vineeth | Updated on Oct 05, 2020

Catalogue

Introduction

Illiquid points to the status of a share, bond, or any other asset which cannot be sold or exchanged for cash at easy, with no significant loss in doing so. Assets that have turned illiquid can prove to be very hard to immediately sell as there are not many buyers or agents interest to buy the same instantly. Even if there are readily available speculators, they may not be willing to shell out the amount you are anticipating in exchange for the asset. Furthermore, an organisation can be deemed illiquid if it is not able to obtain the necessary cash in order to meet all of its debt obligations. Liquidity is the opposite of illiquidity.

Understanding Illiquid

Not so many readily available buyers may lead to a huge difference in the asking price of the seller and the bidding price quoted by the potential buyers in the case of assets that have gone illiquid. This difference can result in a much larger ask-bid spread that what could be found in a market that is in order with everyday trade activities. The insufficiency in the depth of the market (DOM) and potential buyers may lead to owners of illiquid assets to suffer losses, specifically when the owner wants to sell his or her asset immediately.

Risk

Illiquid assets are much riskier than the liquid ones. This is known as liquidity risk. This ratio shoots up exponentially when the markets are experiencing an unfavourable scenario, and the ratio of sellers to buyers is out of proportion. At this juncture, the holders of the illiquid assets may not be able to sell off their assets or sell the same by bearing huge losses. Some assets can ask for a liquidity premium. This is to compensate for the losses that may arise when they turn illiquid, which makes it hard for the buyer to get rid of it.

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