In the investment industry, liquidity risk refers to what?

Liquidity risk is primarily defined as the potential difficulty an investor may face in selling an asset quickly without substantially affecting its price. When an investor encounters liquidity risk, they may not be able to find a buyer for the asset at its fair market value, which could lead to selling at a loss if they need to liquidate quickly.

This concept centers on the relationship between market participants' willingness to buy and sell assets and the overall demand. If there are few buyers or a lack of active market participation, an investor might have to accept a lower price to facilitate the sale. Thus, the correct identification of liquidity risk involves recognizing the implications of selling under unfavorable conditions, which is captured well by the notion of "selling without incurring a loss." This reflects the essence of liquidity within the investment markets.