What are Non-Marketable Securities?
Non-Marketable Securities are securities that are difficult to buy and difficult to sell in the market because they are not being traded in any major secondary market and are generally sold and bought through the private transactions or at the over-the-counter.
Non-marketable securities are the ones that cannot be bought or sold as they are not traded as often in any secondary markets. These are generally brought 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. 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 at all 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 –
- US saving bond
- Shares (private companies)
- Local government securities
- Certificates
- Federal Government bonds
- Government account series
Some securities are prohibited from re-selling 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. 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 to the owner because if he wants to sell, he will have to dilute the ownership and the control of the company
The US issues both marketable as well as non-marketable securities. US treasury bonds and Treasury billsTreasury Bonds And Treasury BillsTreasury Bills or a T-Bill controls temporary liquidity fluctuations. The Central Bank is responsible for issuing the same on behalf of the government. It is given at its redemption price and a discounted rate and is repaid when it reaches maturity.read more are freely traded in the US market
Characteristics of Non-Marketable Securities
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Source: Non-Marketable Securities (wallstreetmojo.com)
#1 – Highly Illiquid
- It is the most important feature that makes a financial instrument.
- 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 GAAPGAAPGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors.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 hence have to be kept till maturity. On the other hand, there are some securities that are transferable and also 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 rate of interest will be dependent 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 bonds 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 bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually.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 market.
- 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 18
- One of the other important reason 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 shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.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, then 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.
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