Hypothetical worked example and primary educational references; not observed market data.
A visible value does not guarantee a ready buyer
Liquidity concerns the ability to transact in a desired quantity and time without an unacceptable price concession. FINRA's bond education discusses the risk of difficulty finding a buyer, while its concentration material highlights holdings that cannot readily support cash needs. A security can be economically valuable yet difficult to sell promptly. Conversely, a frequently traded security can still suffer large price changes. Separate liquidity from solvency and volatility. The relevant household question is not merely what the asset is worth on paper, but how much usable cash it can provide when a payment is due.
Supporting references: 1. FINRA: Bonds
Specify the quantity and deadline
An asset can be liquid for a small order and costly to exit in a large quantity. A buyer may quote an attractive price for only part of the position, while selling the full amount requires lower prices or more time. A transaction deadline can make that constraint more important. Model the actual size and required timing rather than assuming every share or bond can be sold at the most recent quote. A plan that allows gradual sales has different flexibility from one requiring immediate proceeds. Neither case is summarized adequately by the fact that a market or listing exists.
Hypothetical worked example
Two assumed liquidation concessions
Model setup
Read these assumptions before comparing the scenarios.
- All monetary amounts in this example are hypothetical U.S. dollars (USD), not current prices, quoted account terms or observed market data. Percentages, counts, time periods and index levels retain their stated units.
- Position reference value is 20,000; cash requirement is 15,000.
- The proportional concession applies uniformly; no other costs or access restrictions.
Reference value to sell for 15,000 (USD)
- 315,463.92
- 1217,045.45
Expanded scale, not zero-based; dots show small differences.
- Lowest displayed value
- 15,463.92
- Highest displayed value
- 17,045.45
Hypothetical cases from the table below, in the stated units. Not market observations, a forecast or a recommended choice. Read the scenario assumptions before comparing.
| Concession (%) | Proceeds from full position (USD) | Reference value to sell for 15,000 (USD) |
|---|---|---|
| 3 | 19,400 | 15,463.92 |
| 12 | 17,600 | 17,045.45 |
Calculation details
- Mild proceeds
- 19,400.00 USD
(20000 * 0.96999999999999997) - Stress proceeds
- 17,600.00 USD
(20000 * 0.88) - Mild required sale
- 15,463.92 reference-value USD
(15000 / 0.96999999999999997) - Stress required sale
- 17,045.45 reference-value USD
(15000 / 0.88)
Translate a haircut into available proceeds
Assume a hypothetical position has a reference value of USD 20,000. Under one invented execution scenario, selling the full position requires a 3% concession, producing 19,400. Under a stressed scenario, the concession is 12%, producing 17,600. If the investor must raise 15,000 and the same proportional concession applies to the amount sold, the reference-value amount needed is approximately 15,463.92 at 3% and 17,045.45 at 12%. These are conditional arithmetic examples, not measured liquidity discounts. They show how the sale constraint can force an investor to dispose of more assets than an unadjusted valuation suggests.
Access restrictions can be more severe than a discount
Some investments have contractual lockups, redemption gates, notice periods, or limited secondary markets. In those cases, assuming a larger haircut may still fail to model the real problem: the transaction might not be available at all before the obligation is due. Read the access terms rather than inferring liquidity from a periodically reported value. A fund share and its underlying holdings can also have different liquidity arrangements. The investor's rights to redeem or sell the share matter separately from the portfolio's ability to trade assets. The educational table addresses price concessions only, not an outright access prohibition.
Common cash needs can connect selling pressure
During stress, many investors may seek to sell the same assets at once, while buyers become less willing to commit capital. A security's past trading ease does not guarantee future exit conditions. Holding several illiquid positions can create a concentration in access risk even if the issuers are unrelated. FINRA's concentration discussion makes this particularly relevant for households with near-term cash commitments. Map when money is needed and which assets can realistically supply it. A liquidity reserve can provide flexibility, but the plan should define its purpose and adequacy rather than assume any cash amount solves every possible funding gap.
Supporting references: 2. FINRA: Concentrate on Concentration Risk
Plan from obligations back to assets
List essential payments, their dates, and the consequences of delay, then match them to resources with appropriate access. Investment goals beyond those commitments can tolerate different sale uncertainty. A larger hypothetical return does not compensate for missing a payment if the proceeds cannot be obtained in time. Review transaction costs, position size, and contractual access when evaluating portfolio suitability. The haircut calculations help convert a valuation into a conditional funding estimate, but they are not quotes or guarantees. A sound liquidity plan remains usable when markets are less accommodating than the most convenient displayed price suggests.
Test another situationEnough total value can still fail an immediate payment
A separate hypothetical case. Its inputs differ from the main worked example above.
Enough total value can still fail an immediate payment
Imagine a hypothetical USD 15,000 position with buyers available today for only USD 6,000 of reference value. Assume selling that tradable portion requires a 10% concession, while the rest cannot be sold until after a USD 7,000 bill is due. The immediate funding shortfall is exactly USD 1,600. Applying a uniform haircut to the full position would incorrectly assume that all of it could be sold in time. Accepting an earlier partial sale might improve cash certainty while sacrificing continued exposure on those units. The central constraint is available quantity before the deadline, not merely a lower average valuation.
Model unavailable trades as unavailable
FINRA identifies illiquid concentration as a threat to timely cash access. In a funding worksheet, distinguish a price-concession assumption from an explicit prohibition, notice period or absence of buyers. A sufficiently large haircut does not model a sale that cannot occur. Mark the date when each resource can first provide usable proceeds and compare it with the bill calendar. If a backup is a loan or another asset sale, document that dependency separately rather than treating it as automatic cash. This produces a funding plan that can fail visibly when access is insufficient, even when reported net wealth remains positive.
Supporting references: 3. FINRA: Concentrate on Concentration Risk
Check this case’s calculations
- Immediate bill gap after limited partial sale
- 1,600.00 USD
(7000 - (6000 * 0.90000000000000002))
Limits of this additional case
- The available quantity and concession are hypothetical; actual access can change abruptly and depend on order size.
Limits of this analysis
- Actual order size can change the concession nonlinearly.
- Lockups and gates may prevent a sale rather than merely reduce price.
- The haircut assumptions are not observed discounts or executable quotes.
Sources and scope
- FINRA: Bonds
Bondholders face interest-rate, credit, call, inflation and liquidity risks.
Scope: U.S. investor education; supports the stated mechanism, not the hypothetical scenario or a forecast.. Reference accessed 2026-10-06.
- FINRA: Concentrate on Concentration Risk
Large exposures and overlapping holdings can amplify portfolio losses.
Scope: U.S. investor education; supports the stated mechanism, not the hypothetical scenario or a forecast.. Reference accessed 2026-10-06.
- FINRA: Concentrate on Concentration Risk
Correlated assets, employer shares and overlapping funds can concentrate losses.
Scope: Primary educational reference supports only the attributed mechanism; the USD scenario and decision analysis are independent illustrations, not personalized advice.. Reference accessed 2026-10-26.
Illustrative calculations are not forecasts or personal recommendations. Editorial standards
