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.
What are Non-Marketable Securities?
Non-marketable securities are the ones which 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 in OTC markets (over the counter). It is difficult for the owner of the non-marketable securities to find a buyer. Also, even some marketable securities cannot be sold at all because of many government rules and regulations.
Why Some Securities are 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 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 of the securities are prohibited from re-selling and have to be held until maturity like the US saving bonds which are to be held until maturity. Another example would be of private security like limited partnership investments that cannot be sold due to the difficulty of reselling. Non-marketability of the shares of a private company 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
US issues both marketable as well as non-marketable securities. US treasury bonds and Treasury bills are freely traded in the US market
Characteristics of Non-Marketable Securities
#1 – Highly illiquid
- This is the most important feature that makes a financial instrument classified as non-marketable security.
- These securities are non-liquid and cannot be converted into the cash till the maturity date has passed.
- The maturity period is not defined. However, as per the convention and GAAP rules, the duration is typically longer and can range from more three years to ten
#2 – Transferable
- Some of the non-marketable securities are not transferable and hence have to be kept till maturity. On the other hand, there are some securities which 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 assured that the investor will get principal back and the rate of interest will be dependent on the market rate. However, it is assured 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 income in hand He wants to invest it for 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 US Savings Bond. He has to select one of these
Looking at the investor’s preference and needs it is advisable that he selects 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 in the near future.
One more factor to consider here is that these bonds will definitely provide 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 bonds after every maturity. Also, the features of these bonds do not satisfy his needs
Advantages
- The US bonds can be purchased by investors 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 great purchased for others. For example, one can purchase a bond which is non-marketable 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. This increases the quality of investments. These bonds are considered the safest form of investments which consumers can choose. However, there is a limit to the amount an individual can buy. These bonds have the low principal risk and the return is guaranteed
- This 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 liquidity. If an investor owns a bond which is non-marketable and 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 of getting more returns even if the market performs well
- There are also non-marketable securities which 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 till 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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