Liquidity describes how quickly you can turn an asset into cash at a fair price. A heavily traded share is liquid: there is always someone on the other side. A share that trades a few times a month is illiquid, and selling a large holding may require accepting a worse price.
Key takeaways
- Illiquidity is a real cost even when it never shows up as a loss on paper.
- New and small markets are typically less liquid than established ones.
- The wider the gap between buying and selling prices, the less liquid the asset.
