Liquidity risk

Liquidity generally defines the ability to execute a larger transaction on the market quickly, at low cost and without moving the market price. For investors as well as recipients of funds, liquidity is a significant factor. Investors do not know when they will need to sell the assets, and the recipients of the funds are concerned about the risk that they will not be able to finance themselves.

Liquidity risk is divided into liquidity risk in financing and liquidity risk of assets. Financing risk arises from the fact that, when a debt expires, an entity must obtain new assets for smooth operations somewhere, whether in the form of refinancing a loan or obtaining new funds from another title. On the other hand, we talk about liquidity risk when there is a possibility that a company will not be able to conduct a transaction at market (fair) price in a particular market due to lack of buyers or sellers.