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Ignore Liquidity At Your Peril

Liquidity is valuable to investors. Therefore, investors demand higher expected returns for less liquid stocks. The liquidity of an asset market refers to the ability of investors to buy and sell significant quantities of that asset, quickly, at low cost and without a major price concession.

Thus, liquidity risk can be thought of as the risk to investors that an investment cannot be bought or sold quickly enough to prevent or minimize a loss. The size of the bid/offer spread and the amount of daily volume are frequently used as measures, or indicators, of liquidity risk.

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