Quick Answer
Marketability is how easily a security can be sold in the secondary market without a significant price concession. Liquidity need is how soon a customer may need cash. The two are separate: a security's marketability does not depend on the customer, and a customer's liquidity need does not depend on the security.
These two ideas get tested both together and apart, so keep them as two separate facts before deciding whether they fit each other.
What Makes a Security Marketable?
- Marketability: how easily a security in the portfolio can be sold in the secondary market without a significant price concession.
- Securities that trade in deep, active secondary markets, such as widely held, exchange-listed common stock or frequently traded bonds, are the most marketable.
- Restricted securities, including private placement securities, are the least marketable. Resale is limited or conditioned, and there is no established public secondary market.
How Does Marketability Differ From a Customer's Liquidity Need?
- Liquidity need: how soon the customer may need to convert a holding to cash.
- Marketability is a property of the security. Liquidity need is a property of the customer. Either half of that pairing can be tested on its own: what makes a given security more or less marketable, or what a customer's liquidity need is, apart from any judgment about whether the two fit together.
Exam Tip: Gotchas
- A private placement security's restricted status is a marketability fact, not a suitability conclusion. Identifying a security's marketability is a separate task from deciding whether it belongs in a given customer's account, which is a suitability question covered in the best-interest and suitability unit.
What Should You Check on Exam Day?
- Separate a marketability question (a fact about the security) from a liquidity-need question (a fact about the customer) before answering.
- Rank marketability correctly: widely held, exchange-listed securities are the most marketable; restricted, private placement securities are the least.
- Do not read a low-marketability security as automatically unsuitable; that judgment depends on the specific customer's liquidity need, not on the security alone.