Question

What is the marketability premium? Why should an issuing firm consider paying this premium?

Answer 1

The marketability premium is the premium charged from the companies for the 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, nature and other factors of the company. A company with big size having presence in multiple geographical locations across the country and internationally will have less marketibility premium. Similarly a company which has created a great reputation and brand name in the market and enjoys huge goodwill will have less marketability premium.

An issuing firm should consider paying this premium as the investors will invest after taking into account the risk arising out of marketability of the issuing firm securities. All such investment decisions are based on future and the future is uncertain. The risk will 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.