Investing · General financial education

Market liquidity

Market liquidity is the question of whether a position can be sold at limited cost. For a fund, that means meeting redemptions without having to close the position only at a high cost.

In more detail

ESMA defines liquidity risk for funds this way: a position cannot be sold, liquidated or closed at limited cost in order to meet the duty to redeem units at any time. Liquidity stress tests are a manager's tool that runs normal and stressed conditions. That is different from the cash buffer at home, meaning whether you can pay bills.

Background

Read next to everyday liquidity, ETFs, the trading spread and risk: thin markets and many redemptions at once are fund questions. Finmon does not say when you should sell.

An example

A fund holds securities that sell easily on quiet days. In a stressed spell the same sale can move the price a lot. The manager's stress test is meant to run such spells. It is not a tip to sell.

A common misconception

What is easy to sell on quiet days stays easy to sell in a stressed spell.

ESMA defines the risk precisely by the chance that a sale is possible only at a high cost when redemptions have to be met.

Source: ESMA · Liquidity stress testing. Last reviewed: 2026-11-09. Editorially reviewed on 2026-11-09. Next review 2027-11-09. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.