What are Non-Marketable Securities?

Non-marketable securities are the ones that cannot be bought or sold as they are not traded as often in any secondary markets. Instead, these are generally bought and sold privately in private transactions or OTC marketsOTC MarketsOTC markets are the markets where trading of financial securities such as commodities, currencies, stocks, and other non-financial trading instruments takes place over the counter (instead of a recognized stock exchange), directly between the two parties involved, with or without the help of private securities dealers.read more. Therefore, it is difficult for the owner of such securities to find a buyer. Also, even some marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company’s balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more cannot be sold because of many government rules and regulations.

Why are Some Securities Non-Marketable?

The primary and most vital reason for securities to be non-marketable is the need for stable ownership of securities. These securities are mainly sold at a discount to their face value. The gain for the investor is the discount between the face value and the purchase price of the security.

Examples of Non-marketable securities are as follows –

Some securities are prohibited from reselling and have to be held until maturity, like US saving bonds, which are to be held until maturity. Another example would be private security like limited partnershipLimited PartnershipIn a limited partnership, two or more individuals form an entity to undertake business activities and share profits. At least one person acts as a general partner against one limited partner who will have limited liability enjoying the benefits of less stringent tax laws.read more investments that cannot be sold due to the difficulty of reselling. On the other hand, the non-marketability of the shares of a privately held companyPrivately Held CompanyA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more is not a problem for the owner because if he wants to sell, he will have to dilute the company’s ownership and control.

  • US saving bond
  • Shares (private companies)
  • Local government securities
  • Certificates
  • Federal Government bonds
  • Government account series

The US issues both marketable as well as non-marketable securities. US treasury bonds and Treasury billsTreasury Bonds And Treasury BillsTreasury Bills (T-Bills) are investment vehicles that allow investors to lend money to the government.read more are freely traded in the US market

Characteristics of Non-Marketable Securities

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#1 – Highly Illiquid

  • It is the most important feature that makes a financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more.These securities are non-liquid and cannot be converted into cash till the maturity date has passed.The maturity period is not defined. However, as per the convention and GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more rules, the duration is typically longer and can range from more than three years to ten

#2 – Transferable

  • Some of these securities are not transferable and have to be kept until maturity. On the other hand, some securities are transferable and used as gifts.Illiquid and non-transferable are the characteristics which complement each other.

The above two features are used to classify any security as non-marketable.

#3 – High Return

  • These securities usually have long maturities and are government-backed. It is assumed that the investor will get the principal back, and the interest rate will depend on the market rate. However, it is assumed that the return will be higher.The return of non-marketable securities is higher than marketable securities.

Example of Non-Marketable Securities

An investor is looking for investment in the long term. He has sufficient disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more in hand. He wants to invest it in his daughter, who is currently five years old. His investment advisor has given him two options – US Treasury bond of thirty, sixty or ninety days, and a US Savings Bond. He has to select one of these.

Looking at the investor’s preference and needs, he should select US savings bonds. US savings bonds are for the long term. They also can be transferred after the child becomes eighteen years old. He also has this amount and will not require it soon.

One more factor to consider here is that these bonds will provide a return with minimum risk. Even though US treasury bondsTreasury BondsA Treasury Bond (or T-bond) is a government debt security with a fixed rate of return and relatively low risk, as issued by the US government. You can buy treasury bonds directly from the US Treasury or through a bank, broker, or mutual fund company.read more provide returns they are for short term like thirty, sixty, ninety days

If the investor selects this option, then he will have to renew these bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more after every maturity. Also, the features of these bonds do not satisfy his needs.

Advantages

  • Investors can purchase US bonds above the age of 18. These non-marketable securities cannot be sold or brought and cannot be traded on the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more.These securities also make great gifts. These securities may be non-marketable, but they can be greatly purchased for others. For example, one can purchase a bond for his child, and they will be able to access it after they turn 18One of the other important reasons is that these securities cannot be brought or sold. It increases the quality of investments. These bonds are considered the safest form of investment that consumers can choose. However, there is a limit to the amount an individual can buy. These bonds have low principal risks, and the return is guaranteed.It means that you will not lose any money and will always get paid higher than what they have invested.

Disadvantages

  • One of the main drawbacks of non-marketable security is its lack of liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more. If an investor owns such a bond and if he is in quick need of cash then this bond cannot be of any use to him since it cannot be sold till the maturity date and the investor cannot cash it to raise any additional cash.As discussed earlier, there is a guaranteed return on these investments. However, there is also an opportunity loss. Since the return is guaranteed, there is no additional scope for getting more returns, even if the market performs well.There are also non-marketable securities that are non-transferable. If an investor is looking to invest in this, they should make sure that they invest only disposable income that is not required until the maturity date. Since they cannot be sold or transferred, there is no way that they can be bought back when needed.

This article has been a guide to Non-Marketable Securities and their definition. Here we discuss the Types and Characteristics of Non-Marketable Securities and their advantages and disadvantages. You can learn more about financing from the following articles –

  • Marketable Securities ExamplesTrading Securities DefinitionAvailable for Sale SecuritiesDilutive Securities