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What is an Illiquid Security?

What is an Illiquid Security?

An illiquid security is one that cannot easily be sold or exchanged for cash on a timely basis.

The lack of ready buyers tends to create a fairly sizable discrepancy between what a seller wants and what a buyer is offering, versus an orderly market where assets change hands at high volumes and therefore have high liquidity. An illiquid security should generally be held only if the investor/owner has a long-time horizon, and therefore can handle the risk of not being able to offload the asset easily.

Examples of illiquid assets are penny stocks, micro-cap stocks, and in some cases a normally liquid asset can become illiquid if market demand dries up quickly. An example would be Mortgage-backed securities (MBS) around the 2008 financial crisis. Before 2007 they were very liquid securities, but during the crisis the market for them became highly illiquid.

How do I allocate my assets in retirement?
What is a Liquidity Ratio?

Keywords: stocks, securities, liquidity, illiquid,