 Sam
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Joined: 21 May 2005
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Location: CALIFORNIA
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 Posted: Thu Apr 15, 2004 1:11 am Post subject: Illiquidity |
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Illiquidity refers to the condition in which a person does not have the required amount of cash in order to fulfill his current obligations. Real property is regarded as illiquid investment because of the time and effort that is required to convert it into cash.
Investments in the liquid markets such as stock exchange are preferred compared to those that are relatively illiquid such as real estate. This is because the forced sale of any item in an illiquid market is at a disadvantageous price. The primary reason behind this is that buyers are willing to pay a higher price for the assets having liquid secondary market than for comparable assets without a liquid secondary market. This discount in the liquidity is the reduced yield or expected return for the assets.
The risk of illiquidity applies to the entire portfolio rather than the individual investments. Financial institutions which manage portfolios are subject to structural and contingent liquidity risk. The former is related to funding asset portfolios in business and the latter is associated with replacing maturing liabilities under potential. |
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