What is the meaning of “liquidity risk” in finance?

Liquidity risk refers to the risk that an investor or financial institution may not be able to buy or sell an asset quickly without causing a significant impact on its price. This can occur when there are not enough buyers or sellers in the market, especially for illiquid assets such as real estate or certain bonds. Liquidity risk is particularly important in times of economic crisis when market participants may be reluctant to trade, or when the market is volatile. Investors may face liquidity risk if they need to sell an asset quickly to raise cash, potentially at a much lower price than expected. This type of risk can be mitigated by diversifying investments or holding more liquid assets.