Question

What are marketability and marketability premium? Why would an issuing company need to pay this premium? (maximum length guide: about 150 words)

Answer 1

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Marketability is the ability of a company how effectively it can increase the market procurement by investing initially and get the profits later on. Many companies have different strategies of marketing. It depends on the management to choose different ways to market their product.

The marketability premium is a premium which is charged from the companies for an uncertainity regarding the ability of the investor to buy or sell the securities of the company quickly and without any substantial loss in value of the security. The premium is charged for the risk regarding the expected cash flow in the future. The marketibility premium depends on the size, goodwill, management, nature and other factors of the company. It will depend on the management also. A company with big size having presence in multiple locations around the country and internationally will have less marketibility premium a possibility . Similarly a company which has created a great reputation and brand name in the market and enjoys huge goodwill can have less marketability premium. This reason makes the companies to increase their capital of the company and spread all over country.

The issuing company should consider paying this premium as the investors will invest after taking into account the risk arising out from the marketability of issuing company securities. This is very important for any company. All such investment decisions are based on the future and the future is uncertain now because of various factors like recent pandemic COVID19. The risk will obviously increase with the time factor. The investors will factor in the unceratinity in future of the marketability of the issuing firm securities before investing today and take very important decisions.