In the investment world, illiquidity refers to assets which can’t be exchanged for cash easily. This might be because there aren’t enough investors willing to buy them.
In business, the term can describe a company that doesn’t have enough cash to meet its debt obligations.
Where have you heard about illiquidity?
Assets might lose some of their liquidity during times of economic or market upheaval. For example, you may hear of commercial property becoming less liquid when the economy is performing poorly and business confidence is low.
What you need to know about illiquidity…
Whereas liquid markets see assets change hands frequently, illiquid assets may only be sold very rarely. If a buyer can’t be found, a seller may need to offer the asset at a knockdown price in order to drum up interest.
In business, illiquid companies, without enough cash to cover their financial obligations, may struggle to continue trading. Even a firm with plenty of assets, such as land, property or machinery, may face the prospect of insolvency if these can’t be converted into cash quickly.
