Marketable Securities vs. Non-Marketable Securities: Financial Instruments Comparison

August 31, 2024 3 min read Finance Investments Banking Financial Instruments Securities Investments Marketability Savings Bonds

A comprehensive comparison between marketable and non-marketable securities, their definitions, characteristics, and implications in financial markets.

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Marketable securities are financial instruments that can easily and quickly be converted into cash at a reasonable price. These securities are typically traded on public markets and include instruments like stocks, bonds, and Treasury bills. Their liquidity and ease of transfer make them highly desirable for both individual and institutional investors.

In contrast, non-marketable securities are financial instruments that cannot be easily sold or transferred. They are often closely-held, meaning there is no public market for these securities. Common examples of non-marketable securities include savings bonds, private company shares, and certain types of certificates of deposit (CDs). These securities are typically bought with the intention of holding them until maturity or for an extended period.

Key Differences Between Marketable and Non-Marketable Securities

Marketable Securities

Liquidity: Marketable securities can be quickly converted into cash. They are traded on public exchanges, providing high liquidity.

Transferability: These securities are easily transferable between parties.
Examples: Common stocks, corporate bonds, Treasury bills, mutual funds.
Valuation: Market prices are readily available, ensuring transparency and real-time valuation.
Risk and Return: Generally, marketable securities have varying risk and return profiles depending on the type (e.g., stocks vs. bonds).

Non-Marketable Securities

Liquidity: Non-marketable securities cannot be easily sold or converted into cash.

Transferability: Difficult to transfer ownership; often requires special documentation or approval.
Examples: U.S. savings bonds, private company shares, certain government or corporate bonds.
Valuation: Market values are not readily available, making valuation more complex and less transparent.
Risk and Return: Usually deemed safer and more stable, albeit with lower returns due to limited liquidity and transferability.

Historical Context and Applicability

Historical Context

The distinction between marketable and non-marketable securities has been crucial in financial markets for centuries. The development of public exchanges has allowed for the growth of marketable securities, providing liquidity and investment opportunities for a wide array of investors. Meanwhile, non-marketable securities have traditionally served specific purposes such as government financing through savings bonds or capital raising for private companies.

Applicability

Understanding the difference between these types of securities is essential for portfolio management, financial planning, and investment analysis. Marketable securities are suitable for investors needing liquidity and flexibility, while non-marketable securities may appeal to those seeking long-term, stable returns.

Comparisons

Stocks vs. Savings Bonds: Stocks are marketable, offering potential for capital gains, whereas savings bonds are non-marketable and provide steady interest.
Mutual Funds vs. Private Equity: Mutual funds are marketable, allowing easy entry and exit, while private equity investments are non-marketable and typically require long-term commitments.

Liquidity: The ability to quickly convert an asset into cash.
Transferability: The ease with which ownership of a security can be transferred from one party to another.
Maturity: The date on which a debt instrument is due for repayment.

FAQs

What are examples of marketable securities?

Examples include common stocks, corporate bonds, mutual funds, and Treasury bills.

Why are some securities non-marketable?

Non-marketable securities are often issued by entities that do not wish to have a public market or are designed for a specific purpose, such as government savings bonds intended to encourage long-term holding.

How can I purchase non-marketable securities?

Non-marketable securities, such as savings bonds, can typically be purchased directly from the issuing entity, like a government agency or private corporation, usually with specific terms and purchase agreements.

Summary

Marketable and non-marketable securities play distinct roles in financial markets. Marketable securities offer liquidity and ease of transfer, making them suitable for investors looking for flexibility and quick access to cash. Non-marketable securities, on the other hand, provide stable, long-term investments, often with lower risk and returns but limited liquidity and transferability. Understanding these differences helps investors make informed decisions aligned with their financial goals and risk tolerance.

References

Investopedia. “Marketable Securities.”
U.S. Department of the Treasury. “Savings Bonds.”
Financial Industry Regulatory Authority (FINRA). “Types of Securities.”