Illiquidity

economic-dictionary

Illiquidity is the characteristic of an asset for which it cannot be easily sold, or, if you want to obtain immediate cash, you would have to accept a price well below what the seller considers fair.

In other words, illiquidity means that a good cannot be exchanged for money in the short term. It can be a financial asset or some other type of property.

First, in the case of financial assets, illiquidity occurs due to the lack of buyers, that is, there is not a sufficient number of interested investors. This can lead to loss if the holder of the instrument is in a great hurry to sell it.

Illiquid financial assets are considered to be high risk, for the same reason that they cannot be easily traded, even more so, in contexts of crisis or uncertainty.

Likewise, outside the financial market, non-current assets are illiquid, particularly in the case of real estate. These usually have a long sales process. This category could also include cars, antiques and other high-value goods.

Illiquidity in a company

In the context of a company, illiquidity means that it does not have enough cash to be able to meet its short-term obligations, such as the payment of bank debts or to its suppliers.

This does not mean that the company does not have properties, as it may have non-current assets that it cannot sell to meet immediate payments. Likewise, it may be that the firm has made sales, but the transactions may have been mostly on credit, so such income has not yet materialized.

For all that has been explained, when analyzing a company, not only its balance sheet and income statement should be observed, but also its cash flow where the effective entry and exit of money from the entity is recorded.

It should also be noted that the sale of illiquid assets is not part of the company's core business. However, in times of crisis, for example, a firm could be forced to divest certain properties to avoid bankruptcy.

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