Marketability of Stocks and Bonds is Quizlet

Introduction

The marketability of a stock or bond refers to the ease with which it can be bought or sold in the market. The more marketable a security is, the easier it is to trade and the lower the transaction costs will be.

Factors Affecting Marketability

Several factors can affect the marketability of a stock or bond, including:

• Size of the Issue: Larger issues are generally more marketable than smaller issues because they are more widely held and there is more interest in trading them.
• Trading Volume: Stocks and bonds that trade frequently are more marketable than those that trade infrequently.
• Bid-Ask Spread: The bid-ask spread is the difference between the highest price at which a dealer is willing to buy a security and the lowest price at which they are willing to sell it. A narrow bid-ask spread indicates a more marketable security.
• Market Conditions: Market conditions can also affect the marketability of stocks and bonds. During periods of high volatility or uncertainty, investors may be less willing to trade, which can reduce liquidity and marketability.

Benefits of High Marketability

High marketability offers several benefits, including:

• Lower Transaction Costs: Stocks and bonds with high marketability typically have lower transaction costs because there is more liquidity in the market.
• Increased Liquidity: High marketability means that there is more demand for a security, which makes it easier to buy or sell quickly.
• Reduced Risk: Marketable securities are less likely to experience large price swings because they can be bought or sold more easily.

Risks of Low Marketability

Low marketability can pose several risks, including:

• Higher Transaction Costs: Stocks and bonds with low marketability typically have higher transaction costs because there is less liquidity in the market.
• Reduced Liquidity: Low marketability means that there is less demand for a security, which makes it harder to buy or sell quickly.
• Increased Risk: Less marketable securities are more likely to experience large price swings because they cannot be bought or sold as easily.

Strategies to Improve Marketability

Several strategies can be used to improve the marketability of stocks and bonds, including:

• Increase the Size of the Issue: Issuing more shares or bonds can increase the number of holders and improve liquidity.
• Increase Trading Volume: Promoting the security and encouraging trading can increase volume and marketability.
• Tighten the Bid-Ask Spread: Offering competitive bid-ask spreads can attract more traders and improve marketability.

Common Mistakes to Avoid

Avoid these common mistakes to maintain the marketability of stocks and bonds:

• Issuing too few shares or bonds: This can limit the number of holders and reduce liquidity.
• Setting too wide a bid-ask spread: This can discourage traders and reduce marketability.
• Promoting the security too aggressively: This can create unrealistic expectations and attract the wrong type of investors.

Conclusion

The marketability of stocks and bonds is a critical factor to consider when investing. Marketable securities offer several benefits, including lower transaction costs, increased liquidity, and reduced risk. By understanding the factors that affect marketability and implementing effective strategies, investors can improve the marketability of their investments and maximize their returns.

Additional Resources

• The SEC's Guide to Marketability of Securities
• Investopedia's Guide to Marketability

Table 1: Factors Affecting Marketability

Table 2: Benefits of High Marketability

Table 3: Risks of Low Marketability

Table 4: Strategies to Improve Marketability