What does it mean for a product to be illiquid?

What does it mean for a product to be illiquid?

• A. It is highly traded, with many buyers and sellers at each moment.
• B. It is traded less frequently, resulting in a wider spread.
• C. It has a narrower bid-ask spread.
• D. It is only traded on foreign exchanges.

Answer: (B)

Illiquidity means there are few buyers and sellers and trades occur only sporadically. When trading activity is low, market makers quote wider prices to compensate for the risk and the difficulty of quickly matching a buyer with a seller. That shows up as a wider bid-ask spread, so selling or buying can be costly and time-consuming. The other statements describe markets with lots of activity or a narrower spread, which are signs of good liquidity, not illiquidity. Being traded on foreign exchanges isn’t a defining factor of illiquidity.

Illiquidity means there are few buyers and sellers and trades occur only sporadically. When trading activity is low, market makers quote wider prices to compensate for the risk and the difficulty of quickly matching a buyer with a seller. That shows up as a wider bid-ask spread, so selling or buying can be costly and time-consuming. The other statements describe markets with lots of activity or a narrower spread, which are signs of good liquidity, not illiquidity. Being traded on foreign exchanges isn’t a defining factor of illiquidity.