Finance Definitions: Periods of Illiquidity

We continue our finance definitions series with our focus on stock-related terms, and we now come to the phrase "periods of illiquidity." This term is rather simple, so we'll get a little break from our intense stock terms. Even so, the phrase is an important definition to know and keep in mind as you invest, so let's dive right into the definition!

The Basic Definition

In a nutshell, a period of illiquidity is a time period when funds are tied up. When you break down the word, it's a little more obvious: "il" is a negation term, and "liquid" means easily accessible or flowing well. So, illiquid means "not easily accessible."

Where Periods of Illiquidity Occur

In the business sense, this period in which funds are not accessible can occur in any industry, but some industries are more prone to periods of illiquidity than others. Generally, for example, the housing industry struggles through times where funds may not be as liquid, such as during the winter when home sales decline and funds just aren't flowing as readily. Of course, right now, the housing industry is experiencing an extended period of illiquidity since home sales have been down for years, foreclosures have increased and delinquencies are up.

Other industries may experience periods of illiquidity as well. Manufacturing, sales, and seasonal sales companies are a few examples, but periods of illiquidity can occur in every business. Simply put, there could be times where money is scarce in almost every business.

Connecting to the Market

When you connect these companies that regularly experience periods of illiquidity with the stock market, you could see the term tossed around as well. Financial companies that are heavily invested in the housing market, for example, may place a disclaimer about their own periods of illiquidity on their home page. Since their investments are based on an industry subject to times of low cash flow, the investment company will also experience periods of illiquidity, and stock prices could drop regularly.

For an individual investor embarking on an investment journey, it's important to keep this term in mind. Knowing that periods of illiquidity are possible in some industries can help you best plan your investments.

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