Chartered Institute of Stockbrokers (CISI) Professional Practice Exam 2025 – The All-in-One Guide to Master Your Certification!

Liquidity risk in investment finance refers to the possibility that an investor may not be able to quickly sell an asset or security without incurring a significant loss in value. This situation arises when there are insufficient market participants willing to buy an asset at a given time, leaving the investor unable to convert their investment into cash promptly.

The essence of liquidity risk is about the market conditions surrounding the asset, rather than the fundamental value of the asset itself. In a highly liquid market, assets can be sold easily at or close to their market value, but in a less liquid market, an investor might have to accept a lower price if they need to sell quickly. This can be especially true for investments in less popular stocks, bonds, or real estate, where the buyer pool may be smaller. Understanding liquidity risk is crucial for investors as it affects their ability to access cash when needed without suffering a negative impact on their investment outcomes.