Definition of Liquidity Risk

Liquidity Risk is the risk that an investor may not be able to sell a security when they need to or that selling a security when they need to will adversely affect the price.

Applying "Liquidity Risk" to Securities Exams:

When an investor has a large position in a security that is very thinly traded the investor is subject to high degree of liquidity risk. If an investor has 20,000 shares of stock that has an average daily trading volume of 25,000 shares the investor would not be able to sell their shares in any single day or even over the course of several days with out dramatically impacting the price of the security. If the investor needed to sell the security immediately they would most likely drive the price of the stock down significantly.

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