Liquidity risk refers to the possibility that an individual or organization may not be able to quickly convert assets into cash without significantly affecting their value. This can occur when there are not enough buyers in the market or when the asset is not easily tradable. For example, real estate or specialized equipment may take longer to sell compared to stocks or bonds. Managing liquidity risk is crucial for businesses and investors to ensure they can meet their financial obligations. Companies often maintain a certain level of cash or liquid assets to handle unexpected expenses or opportunities. Financial institutions, such as banks, also monitor liquidity risk to maintain stability and avoid insolvency during economic downturns.