Liquidity Risk in Stock Investing
Liquidity risk is the risk that a given security cannot be sold in a timely manner to avoid a significant loss or make a desired profit. For these reasons, liquidity risk represents financial risk. Securities that are lightly traded are often referred to as “illiquid” and will generally have higher bid-ask spreads than securities that tend to trade with higher volume. Liquidity risk can also be evidenced by large price swings in the security.
Penny Stocks (generally defined as stocks that trade below $5 per share) offer a good example of liquidity risk as they tend to trade infrequently, often making them difficult for investors to sell and often subject to significant price volatility.
_______________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
Recent Posts
- How to Calculate a Stock Market Profit
- Three Basic Financial Concepts for Investors
- Understand an Calculate the Capital Asset Pricing Model (CAPM)
- Calculate Your Retirement Savings Requirements
- The Basics of Stock Market Futures Trading
- How to Calculate Internal Rate of Return (IRR)
- How to Calculate Earnings per Share
- What the Par Value of a Stock Means
- Bond Value Calculator
- Some Basic Forex Trading Tips
Leave a Comment
You must be logged in to post a comment.