Understanding Non-Marketable Securities: Definition & Examples

Non-marketable security refers to a security that is not traded on any major securities exchange. As a result, it is difficult to buy and sell such securities. Non-marketable securities are mainly traded as part of a private transaction.

Summary

• Non-marketable securities are illiquid securities that do not have an active secondary market and may only trade on over-the-counter exchanges.
• Examples of non-marketable securities include U.S. Saving Bonds, investment in limited partnerships, shares of private companies, etc.
• Investment in non-marketable securities is ideal for investors with a long-term investment horizon, a guaranteed return, and who have disposable income they will not need until the maturity of the investment.

Attributes of a Non-Marketable Security

1. Highly Illiquid

One of the most important features is that the security has no available market for which to trade or sell it. Since there is insufficient liquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount. in the market for such security, in many cases, it has to be held until maturity.

2. Transferability

Some types of securities may not be transferable to other individuals and may be required to be held by the registered owner until maturity. For example, U.S. Saving Bonds are required to be held until maturity.

3. High return

Lack of marketability and illiquidity are attributes that make investors require a higher rate of returnRate of ReturnThe Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage. This guide teaches the most common formulas on non-marketable securities.

The Need for Non-Marketable Securities

Non-marketable securities are primarily issued to ensure stability in ownership of the securities. Other reasons for issuing such a type of securities include the need for a long-term investment horizon.

Non-marketable securities are often issued at a lower price than face value, with the securities being redeemable at face value on maturity. The variance between the face value and issue price of the security represents a higher yield or return for the investor.

Examples of Non-Marketable Securities

Most non-marketable securities are government-issued debt instruments. The following are some examples of non-marketable securities:

• Savings Bonds
• Shares of private companies
• State government securities
• Bonds issued by federal governments

Non-marketable securities such as US Saving Bonds are required to be held until maturity and cannot be resold. Investments in limited partnerships are another example of non-marketable securities that cannot be resold easily due to a lack of availability of buyers. Shares of private companies are also not marketable. However, this is usually not an obstacle unless the owner of the shares wishes to relinquish ownership or control in the company.

Marketable Securities vs. Non-Marketable Securities

The fundamental difference between marketable securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion. and non-marketable securities is the availability of a secondary market to trade marketable securities. Unlike marketable securities, non-marketable securities do not have an observable market value but have an intrinsic value and a book value.

Unlike non-marketable securities, marketable securities are subject to daily price fluctuations and expose the investor to price volatility. On the other hand, the holder of non-marketable securities is not exposed to the risk of price volatility but must accept the risks associated with the lack of liquidity and transferability.

Use of Non-Marketable Securities

An investor is interested in a long-term investment and is looking to invest to save for his 4-year-old son’s college education. He has two options – invest in U.S. Treasury Bonds with various maturities or U.S. Saving Bonds.

Based on his preferences, needs, and time horizon, U.S. Saving Bonds are better suited for the investor. They are a long-term investment and can be transferred to their son when he turns eighteen years old. Also, the savings bonds carry minimum risk, as they are backed by the U.S. Federal Government.

Should the investor decide to invest in U.S. Treasury Bonds, his investment is exposed to the risk of price volatility. Also, he will have to renew the bonds at the designated maturity of the specific bonds he decides to invest in.

Advantages of Non-Marketable Securities

• Non-marketable securities, especially those issued by the government, have negligible default and price risk. It means the investor rarely stands to lose money.
• Mostly, investors are issued non-marketable securities at a discount but are redeemed at face value. The differential represents a higher yield or return to the investor with a minimum risk of loss.

Disadvantages of Non-Marketable Securities

• Lack of liquidity and marketability represents a challenge for investors in the securities. If the investor needs cash quickly, it might be difficult to liquidate their investments quickly.
• Some types of non-marketable securities are non-transferable. If an investor is looking to invest in such securities, they should ensure that they only invest a part of the disposable incomeDisposable IncomeDisposable Income is the money that is available from an individual’s salary after he/she pays local, state, and federal taxes. It is also that they do not require until the maturity of the investment. Lack of transferability means the securities cannot be bought back when needed.
• While non-marketable securities are safe investments that provide for a guaranteed return, their upside is also limited. They do not trade on a secondary market where investors trade on volatility in marketable securities to increase return.

Additional Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)®Program Page - CMSAEnroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses. certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Default RiskDefault RiskDefault risk, also called default probability, is the probability that a borrower fails to make full and timely payments of principal and interest,
• Held to Maturity SecuritiesHeld to Maturity SecuritiesHeld to maturity securities are securities that companies purchase and intend to hold until they mature. They are unlike trading securities or available for sale securities
• Investment HorizonInvestment HorizonInvestment horizon is a term used to identify the length of time an investor is aiming to maintain their portfolio before selling their securities for a profit. An individual’s investment horizon is affected by several different factors. However, the primary determining factor is often the amount of risk that the investor
• Secondary MarketSecondary MarketThe secondary market is where investors buy and sell securities from other investors. Examples: New York Stock Exchange (NYSE), London Stock Exchange (LSE).