Definition of Non-Marketable Securities
Non-marketable investment securities are the ones that can’t be easily converted into cash i.e. they can’t be readily bought or sold due to their limitation of not being traded on any major secondary market exchanges. They are usually debt-based securities and are often traded through a private transaction or in an over the counter (OTC) market.
Securities are classified as non-marketable when it becomes difficult to find a buyer in the market for such securities. Also, there are some government bonds and securities which are not allowed to be resold at all due to applicable rules and regulations. These government securities also fall under the purview of non-marketable securities.
The main reason for the issuance of non-marketable securities is to stable the ownership and the value of the securities. They are generally sold at a discount on the face value and redeemable for face value at maturity. The purchaser of these securities will make gain from the difference in purchase value and the face value at maturity.
Characteristics of Non- Marketable Securities
It can be characterized by the presence of the following features:
- Non-Liquid: Non-marketable securities are highly non-liquid. This means that they can’t be bought and sold easily as they are not traded on secondary stock exchanges and as such,it is very difficult to find buyers for these securities.
- Non-Transferable: Generally non-marketable securities are non-transferable or transferable only after maturity. However, sometimes non-marketable securities do not contain any restrictions regarding transferability and can be used as gifts too.
- Low Risk, High Return: As these securities are mostly government-backed, they give higher returns than marketable securities. For the same reason, they carry less risk.
Examples of Non-Marketable Securities
Here are some common examples of non-marketable securities:
- Saving Bonds: Government saving bonds can only be cashed by the person whose name is on the security documents relating to the original purchase.
- State and Local Government Securities: These consist of a certificate of indebtedness, notes through the treasury market place having a maturity of 15 – 40 years. Interest on these securities is accrued on a daily basis.
- Shares in Limited Partnership: Shares of limited partnership fall under the purview of non-marketable securities due to difficulty in finding buyers for these securities for reselling purposes.
- Private Shares Held by Owner Company: Private shares held byowner companies are also treated as non-marketable securities as they are not publicly traded on stock exchanges.
- Bank and Post Office Accounts: Bank and post office accounts are the most basic examples of non-marketable investment as they are non-transferable and non-marketable in nature.
Marketable vs Non- Marketable Securities
Difference between marketable and non-marketable securities can be understood with the help of the following table:
|They can be freely traded in the secondary market.||They can’t be freely traded in the secondary market due to certain restrictions.|
|Marketable securities have both market value,which fluctuates as per the demand in the market for the particular security, and intrinsic or book value.||Non-marketable securities are not traded on the secondary market and, thus, they do not have a market value, but they only have intrinsic value.|
|They carry a high level of risk and return is subject to market fluctuation.||They carry a low level of risk and return is generally higher than non-marketable securities.|
Benefits of Non-Marketable Securities
Benefits of non- marketable securities are listed below:
- They provide a guaranteed rate of return.
- The return is generally higher than marketable securities. Further, due to the guaranteed rate of return, they carry low risk.
- They are immune to volatility fluctuations due to change in demand in the market as these securities are not traded in the secondary market.
- They can be purchased as a gift for a minor or other people, and that person can reap out the benefits post maturity.
Drawbacks of Non-Marketable Securities
Drawbacks of non-marketable securities are as follows:
- They are highly non-liquid, so an investor with a quick need for cash will find these securities of no use for his circumstances.
- Generally, these securities have guaranteed return, which also means an opportunity loss, as non-marketable securities would not provide a higher rate of return in case of good market conditions. On the other hand, marketable securities will provide a higher return in case of improved market conditions.
- Investors should ensure to invest only that part of disposable income in non-marketable securities which is not required sooner, as the securities are non-transferable and non- marketable in nature.
An investor should consider his circumstances such as whether they want liquidity in the near future or guaranteed return in the long term. It also depends upon the risk appetite of the investors. So, multiple combinations of investment objectives or factors should be kept in mind while deciding to invest in non-marketable securities.
This is a guide to Non-Marketable Securities. Here we also discuss the definition and characteristics of non- marketable securities along with benefits and drawbacks. You may also have a look at the following articles to learn more –