An illiquid market is a market in which the level of trading has decreased considerably, owing to the current expense associated with the assets that are available for trading and the willingness of investors to pay those prices. Lack of interest in the assets available for trade, such as in a collectibles market, may also be the underlying reason for this type of market development. Just about any type of market can experience a period of being illiquid, ranging from the local real estate market to the trading volume found on an exchange. An illiquid market will continue until some set of circumstances prompts investors or buyers to once again become interested in making purchases and the market is stimulated by an upswing in completed purchases.
One of the more common examples of an illiquid market is found in a slowdown in sales volume within a real estate market. A number of factors can come together to make this type of market illiquid for a period of time. While there may be homes for sale in the area covered by the market, issues such as a high rate of unemployment or inflation that puts additional stress on household budgets may discourage buyers from actively trying to purchase a home, even if the prices of the homes are very reasonable in comparison to current market value. When economic factors prohibit buyers from moving forward with seeking financing to buy a new home, there is a good chance that the sales volume in that market will remain low until those economic circumstances change for the better.
It is also possible for an illiquid market to develop with stocks and other types of investments. The trading volume within an investment market such as a stock market or even a currency market may decrease owing to investor concerns about certain types of investments traded within the marketplace. This means that if investors are concerned with how a change in leadership in a leading company will affect the industry overall, they may adopt a wait and see approach, neither buying nor selling until the outcome of the event becomes evident. In like manner, investors may slow trading owing to changes in government due to political elections, undesirable shifts in the economy, or even a natural disaster that threatens to undermine the ability of some businesses to continue performing at a profit.
Like other types of market conditions, an illiquid market will usually continue for a period of time, then begin to shift into a more liquid position as the factors that caused the slowdown in trading to occur are resolved. Depending on the type of market involved, this type of condition may last as little as a few months or remain in place for several months or even years. Typically, governments will attempt to use resources and powers inherent in central and federal banks to stimulate the economy and hopefully in turn motivate additional trading that lifts the market out of the slump and restores it to liquidity.
