FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client holds an investment in a non-traded Real Estate Investment Trust (REIT) and wishes to sell their shares. Which of the following is the MOST significant risk associated with liquidating this type of investment?
- AInterest Rate Risk
- BLiquidity Risk
- CMarket Risk
- DCredit Risk
Show answer & explanationAnswer & explanation
Correct answer: B. Liquidity Risk
Non-traded REITs are not listed on exchanges, meaning there is no active secondary market for their shares. This makes it very difficult for investors to sell their shares quickly or at a fair market price, leading to significant liquidity risk.
Why the other options are wrong
- A. Interest rate risk affects all income-producing investments but is not the primary liquidation risk for a non-traded REIT.
- C. Market risk (systematic risk) affects all investments but is not the most direct risk when trying to sell a non-traded REIT.
- D. Credit risk relates to the issuer's ability to pay, not the ease of selling the investment itself.
Non-Traded REIT Liquidity Risk
Non-traded Real Estate Investment Trusts (REITs) are illiquid investments because they are not listed on a stock exchange. Investors may find it difficult or impossible to sell their shares quickly or at a desired price, if at all.
- Not listed on public exchanges.
- No active secondary market.
- Difficult to sell shares quickly.
- May have redemption programs, but often with limits/fees.
Memory trick: No Trades, No Sales, No Quick Cash.