Loans and financial matters

When an investor wants to sell an asset, he or she is concerned whether the price that can be obtained from dealers is close to the true value of the asset. For example, if recent trades in the market for a particular asset have been between $40 and $40.50 and market conditions have not changed, an investor would expect to sell the asset in that range.
Liquidity risk is the risk that the investor will have to sell an asset below its true value where the true value is indicated by a recent transaction. The primary measure of liquidity is the size of the spread between the bid price (the price at which a dealer is willing to buy an asset) and the ask price (the price at which a dealer is willing to sell an asset). The wider the bid-ask spread, the greater the liquidity risk.
Liquidity risk is also important for portfolio managers that must mark to market positions periodically. For example, the manager of a mutual fund is required to report the market value of each holding at the end of each business day. This means accurate price information must be available. Some assets do not trade frequently and are therefore difficult to price.