Liquidity risk has two different meanings. In finance, it is the risk that an asset will have to be sold at a price below the market price due to its illiquidity. In economics, on the other hand, liquidity risk is a measure of someone’s ability to meet their short-term obligations (be it a company, an individual or an institution). A simpler way to understand Liquidity Risk is that to say that an asset is illiquid, we have to be dealing with an asset that is not traded frequently, which means that it is an asset on which the number of transactions is low. When this asset is illiquid, it is said that there is not a liquid market, so the demand and the number of available buyers who are able or willing to purchase the asset will be low.

This is a challenge as it complicates the ability to convert the asset into cash. Along with this concept, it must be understood that liquidity risk is also a case where, although an individual may or may not have assets, he or she may be in danger of not being able to pay bills or operating costs in the short term.