A non-marketable security is a financial instrument that is difficult to trade on the open market due to the absence of a readily available trading platform or standardized exchange for such securities. These securities often lack liquidity and may incur higher transaction costs if traded.
Types of Non-Marketable Securities
Savings Bonds
These government-backed bonds are typically non-transferable and must be held until maturity or redeemed by the original purchaser.
Restricted Stocks
These are shares of a company that are not freely transferable until certain conditions, such as vesting periods or performance milestones, are met.
Private Company Stocks
Shares issued by private corporations that are not listed on public exchanges and thus cannot be easily bought or sold.
Municipal Bonds
Some municipal bonds can be non-marketable, typically those held directly through a government agency or a private placement.
Comparison with Marketable Securities
Liquidity
Marketable Securities
Marketable securities such as publicly traded stocks, government treasury bonds, and corporate bonds are highly liquid and can be easily traded on various exchanges.
Non-Marketable Securities
Conversely, non-marketable securities have limited liquidity. Selling these assets often requires finding a private buyer and negotiating terms, which can be time-consuming and costly.
Trading Platforms
Marketable Securities
These are listed on recognized exchanges like the NYSE, NASDAQ, or bond markets, facilitating easy transfer of ownership.
Non-Marketable Securities
Usually traded over-the-counter (OTC) or held privately, lacking a standard trading platform.
Transaction Costs
Marketable Securities
Lower due to competitive brokerage fees and the presence of multiple buyers and sellers.
Non-Marketable Securities
Higher due to the lack of competitive market forces and the complexity involved in the transaction.
Examples of Non-Marketable Securities
- U.S. Savings Bonds - Cannot be sold in the secondary market.
- Private Equity - Investments that are not listed on public exchanges.
- Employee Stock Options (ESOs) - These are non-transferable without company consent.
Special Considerations
Valuation
Valuing non-marketable securities can be complex, often requiring professional appraisal to determine their worth.
Holding Period
Longer holding periods are common, as these securities are typically intended for long-term investment.
Ownership Transfer
Legal and procedural hurdles may be involved in transferring ownership, especially for restricted stocks and private company shares.
Historical Context
The distinction between marketable and non-marketable securities became more pronounced with the development of organized stock exchanges and regulatory frameworks, which standardized and facilitated the trading of marketable securities.
Applicability in Modern Finance
Portfolio Diversification
Despite their lower liquidity, non-marketable securities can play a vital role in diversification, potentially offering higher returns through private equity or unique investment opportunities.
Risk Management
They can also serve as a hedge against market volatility, given their lack of correlation with marketable securities.
Related Terms
- Illiquid Assets: Any asset that cannot be quickly converted into cash without a substantial loss in value.
- Restricted Stock Units (RSUs): Equity compensation given to employees, subject to vesting conditions.
- Over-the-Counter (OTC): Trading that is carried out directly between two parties without supervision of an exchange.
FAQs
Why invest in non-marketable securities?
How can one sell non-marketable securities?
References
- “Guide to Non-Marketable Securities,” Investopedia.
- “Understanding Marketable and Non-Marketable Securities,” Financial Education Resources.
- “Liquidity in Financial Markets,” Journal of Financial Studies.
Summary
Non-marketable securities are unique financial instruments that, while challenging to trade and valuate, offer specialized investment opportunities and serve specific roles in diversified portfolios. Understanding their characteristics, risks, and benefits is essential for informed financial decision-making.
