What is liquidity risk?

Liquidity risk is the risk of being unable to sell or redeem an asset in time and at a fair price when you need to.

The criteria for investment product risk grades require liquidity risk to be stated in the product description in 3 levels, according to whether early redemption is possible and at what cost: 'early redemption not possible', 'costs incurred on early redemption' and 'early redemption permitted'. Even if a product's structure places no restrictions on redemption, liquidity risk can increase if there is no market in which to trade it or trading is thin.