Liquidity risk is the risk that a given security cannot be sold in a timely manner to avoid a significant loss or make a desired profit. For these reasons, liquidity risk represents financial risk. Securities that are lightly traded are often referred to as “illiquid” and will generally have higher bid-ask spreads than securities that tend to trade with higher volume. Liquidity risk can also be evidenced by large price swings in the security.
Penny Stocks (generally defined as stocks that trade below $5 per share) offer a good example of liquidity risk as they tend to trade infrequently, often making them difficult for investors to sell and often subject to significant price volatility.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.