Liquidity Key Price Factor

Liquidity—the ability to buy and sell significant quantities of a given asset, quickly, at low cost and without a major price concession—is valuable to investors. Therefore, they demand a premium as compensation for the greater risks and costs of investing in less liquid securities.

For example, liquidity risk partly explains the equity-risk premium. The average transaction costs on stock trades are far larger than they are on Treasury bills, which can be traded in large blocks of tens of millions of dollars in a single transaction without affecting their price.

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