📚 PASS Research Analyst Certification Examination Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 12.3 — Risks in Investments

During a portfolio review, you may encounter a client who holds a mix of Nifty 50 stocks and a series of long-term Bank Fixed Deposits or Public Provident Fund (PPF) accounts. While the client perceives these assets as ‘safe’ because they lack price volatility, you, as a research analyst, must identify the hidden trap: these assets are non-marketable.

Marketable securities are instruments that can be sold rapidly in the secondary market—such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE)—with minimal impact on their price. Conversely, non-marketable securities lack a secondary market, meaning their liquidity is fundamentally constrained.

In your valuation work, the distinction between these two classes is paramount. When you analyze a company, you assume that its shares can be offloaded if the thesis turns sour, which is the definition of marketability.

However, if you are advising a client on asset allocation, you must recognize that non-marketable instruments create a ‘liquidity trap.’ Even if the underlying value of a non-marketable investment remains stable, the investor is essentially locked in until maturity or subject to specific exit penalties. This lack of marketability means you cannot ‘mark to market’ these assets daily, leading to a disconnect between perceived value and real-time liquidity.

Consider the case of an unlisted corporate bond or a private equity stake versus a liquid government security. The government security is highly marketable, allowing the investor to exit at the prevailing market price at a moment’s notice. The non-marketable asset, however, requires a long holding period, making it unsuitable for portfolios that prioritize agility. As an analyst, you must ensure that your client’s portfolio construction matches their liquidity needs; holding too many non-marketable assets can leave a client ‘asset rich but cash poor’ during a market downturn.

Ultimately, marketability is the bridge between a theoretical valuation and a practical exit strategy. When drafting investment notes, never confuse volatility with liquidity. A highly volatile stock is still marketable, whereas a rock-steady fixed deposit may be entirely non-marketable. By properly categorizing these assets, you help your clients avoid the danger of being unable to access their capital when it is most required.1

Nuance

⚠️ Nuance
Candidates often conflate ‘market risk’ (price volatility) with ’liquidity risk’ (the inability to sell). They assume that because a fixed deposit does not fluctuate in price, it is ‘risk-free.’ In reality, the absence of a secondary market makes it entirely illiquid, which is a significant risk factor if the investor faces a sudden cash flow requirement. A professional analyst must view liquidity as a distinct dimension of risk that persists even when market price fluctuations are absent.

Check Your Understanding

Practice Question 1

An investor holds a certificate of deposit that cannot be sold or transferred to another party before its maturity date. How should an analyst classify this investment regarding liquidity?

Practice Question 2

Which of the following statements best describes the relationship between marketability and price impact?

This is a companion read for Section 12.3 — Risks in Investments from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. Marketability refers to the ease of converting an asset into cash without significant price concession, whereas liquidity refers to the presence of an active market to facilitate such trades. ↩︎