What type of risk is associated with the uncertainty of being able to sell an asset?

Liquidity risk refers to the potential difficulty in selling an asset without causing a significant decline in its price. This type of risk arises when there are not enough buyers in the market to match the sellers, which may lead to delays in executing transactions or the necessity to sell at a lower price. In the context of investments, if an asset is illiquid, the investor might not be able to sell the asset quickly or at a fair market price, especially during times of market stress.

Understanding liquidity risk is crucial for investors because it can impact the overall performance of their investment portfolio and their ability to access cash when needed. Unlike credit risk, which deals with the likelihood of a borrower defaulting on a loan, or market risk, which pertains to the potential for losses due to market fluctuations, liquidity risk specifically addresses the unique challenges tied to the ease of buying and selling assets in the marketplace.