I wish I knew what liquidity was, but I’m too embarrassed to ask

Put simply, liquidity refers to how easy it is to buy or sell an asset without moving the price against you. For example, property – both residential and commercial – is an illiquid asset. It takes a long time to buy or sell, trading costs (from stamp duty to surveys) are high, you can never be quite sure of the price you’ll get (or pay) until the deal has closed, and if you want to sell in a hurry, you’ll have to cut your price to well below the theoretical “market value”.

On the other hand, shares in big, listed companies (“blue chips”) on the FTSE 100, for example, are very liquid. They are also “fungible” – ie, one share is the same as another, whereas each property is unique – so millions can change hands every day online. You can get a price almost instantly, and you can almost always find a willing buyer or seller, even in turbulent financial conditions.

The level of liquidity in a market can vary widely – for all but the most liquid assets, it’s wise to assume that it will dry up at the worst possible times. In times of turmoil it may even evaporate altogether. For example, one big problem in the lead up to the 2008 financial crisis was that liquidity in the market for securities backed by subprime mortgages dried up entirely, and the securities were essentially unsellable.

Stocks in smaller companies can also be highly illiquid – when the market is volatile, the “spread” (the gap between the price at which you can sell and the price at which you can buy) might widen sharply, making trading more costly. Indeed, in the very worst panics, only “safe haven” government bonds, such as US Treasuries and UK gilts, may remain as liquid as they usually are.

Illiquidity is not in itself a problem. You usually get paid more to hold illiquid assets. The real problem only arises when you own an asset that turns out to be a lot less liquid than you expected – for example, if you own a fund that promises daily liquidity, yet holds a portfolio full of illiquid assets.