Illiquidity - Financial definition

Illiquidity arises in markets where there are few buyers and sellers, resulting in significant price volatility and wider bid-ask spreads. For instance, real estate and private equity are typically illiquid assets because they cannot be sold rapidly without potentially incurring a significant discount.

In contrast, highly liquid markets, like those for government bonds or large-cap stocks, feature more participants and frequent trading, facilitating quicker transactions at more stable prices. Market practices to manage illiquidity include holding diversified portfolios and employing liquidity risk premiums to compensate for the potential difficulty in selling assets.