Illiquidity Definition – What is Illiquidity? | CFI VU


Illiquidity describes when a trader is unable to trade an [instrument] in the market in a straightforward manner. The primary cause of illiquidity is a lack of supply and demand for the instrument which indicates a possible lack of traders.


An instrument may have opened trading with [liquidity], but news events throughout the trading day can drive demand away from the market, leaving it in an illiquid status by the end of the day. If a trader owns an illiquid instrument, they might have to suffer a loss in order to rid themselves of the instrument if they are uncertain when or if it will be able to recover from that status.


In an illiquid market born of a lack of buying and selling traders, there will often be a large discrepancy in the [ask] and [bid] prices of the instrument. This will lead to a much larger bid-ask spread than is normally found in liquid markets. Due to this lack of [market depth], holders of illiquid instruments will often suffer losses, especially if they are seeking to sell the instruments quickly.


In the case of illiquid stocks, they will often have a liquidity premium reflected in their price due to the fact that they may be harder to offload in the future. This is especially true in times of market uncertainty when the ratio of traders desiring to enter the market will usually be far outweighed by traders seeking to exit, and therefore, holders of illiquid assets will find it very hard to dispose of these at a good price, if at all.


Key takeaways:


  • An illiquid asset is a financial instrument that cannot easily be traded
  • Illiquidity is commonly caused by a lack of traders or a lack of volume demand for an instrument
  • Instruments may originally trade with liquidity but due to market and news events, may in the future become illiquid
  • Holders of illiquid stocks may have to dispose of these at a loss if they wish to dispose of them quickly


CFI Financial Group is an award winning global financial markets provider with over 23 years of experience and regulated entities in several jurisdictions, focused on offering impeccable execution and trading conditions including very low spreads, professional services, dedicated support and powerful tools.
Credit Financier Invest Limited has regulated subsidiaries in
London • Larnaca • Beirut • Amman • Dubai • Port Louis
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We would like to remind that while we endeavour to provide best possible services, Credit Financier Invest Limited provides execution only services and any information, reports, opinions, commentary or other materials he receives from CFI directly or from its employees or through any analytical tools provided to him or third party research provided to him from the Company shall not be deemed as investment advice and it cannot be relied upon to make investment decisions. The Client commits to make his own research and from external sources as well to make any investment. The Client accepts that CFI will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The contents of any report provided should not be construed as an express or implied promise, as a guarantee or implication that clients will profit from the strategies herein, or as a guarantee that losses in connection therewith can, or will be limited.

Forex and CFDs are leveraged products that incur a high level of risk and a small adverse market movement may expose the client to lose the entire invested capital. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The possibility exists that you could sustain a loss in excess of your deposited funds even if a stop loss is used and therefore, you should not speculate with capital that you cannot afford to lose and be aware of trading risks. Credit Financier Invest Limited provides general information that does not take into account your objectives, financial situation or needs. The content of this website must not be interpreted as personal advice. Please ensure that you understand the risks involved and seek independent advice if necessary.

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