What does it mean for an asset to be 'illiquid'?

An asset is considered 'illiquid' when it cannot be easily converted into cash or sold without incurring a significant loss in value. This means that the asset may take a long time to sell, and when it is sold, it may not fetch a price that reflects its intrinsic worth or initial investment. Illiquid assets are often harder to trade in markets that lack sufficient buyers or where the asset itself does not have a broad appeal.

In contrast, assets that can be quickly sold for cash are deemed liquid, as they have a ready market, allowing for smooth transactions without substantial price reductions. Regular income generation does not necessarily correlate to an asset's liquidity, as some income-generating assets can still be illiquid. Similarly, high demand for an asset could indicate it is liquid, but it doesn't inherently define an asset’s liquidity status, as some in-demand items may still be challenging to sell quickly without a loss. Thus, the defining factor of illiquidity is the difficulty of selling the asset without suffering a considerable drop in value.