What does the term 'illiquidity' refer to in finance?

Illiquidity in finance specifically refers to the difficulty of converting an asset into cash without significantly impacting its price. When an asset is illiquid, it means there is a lack of buyers or a market that can readily absorb that asset, making it challenging to sell quickly or without loss in value.

For example, real estate or certain collectibles may take a long time to find a buyer, and when they do sell, they may not fetch their true market value or the value one would expect based on their worth if they were more liquid. This contrasts with liquid assets, like stocks or cash, which can be easily converted to cash.

The other concepts described, such as high asset turnover, the risk of asset depreciation, and inability to pay debts, do not encapsulate the essence of illiquidity. High asset turnover relates to how quickly a company sells its inventory, while asset depreciation is about loss of value over time. Inability to pay debts pertains to liquidity but does not define illiquidity directly; rather, it describes a financial condition resulting from it.