Liquidity premium
Principles of Finance glossary · Principles Of Finance
Definition
Compensation for holding an asset that is difficult to trade quickly at fair value.
Liquidity premium in plain English
Imagine trying to sell a rare comic book versus selling a $20 bill: the $20 spends instantly at full value, but the comic might take weeks and you may have to slash the price to find a buyer fast. That difficulty of turning something into cash quickly without losing value is called illiquidity, and investors dislike it. So they demand a little extra reward, the liquidity premium, for tying up money in hard-to-sell assets. In short: the harder something is to cash out, the higher the return people insist on before they will buy it.
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