What Is a Non-Marketable Security?
Let me explain what a non-marketable security is: it's an asset that's tough to buy or sell because it isn't traded on any major secondary market exchanges. These are often debt or fixed-income securities, and you can only buy or sell them through private transactions or in an over-the-counter (OTC) market.
If you hold one of these, finding a buyer can be a challenge, and some can't be resold at all due to government regulations that prohibit it. Compare this to a marketable security, which is listed on an exchange and trades easily.
Key Takeaways
- Non-marketable securities are assets that you can't easily liquidate to cash in a timely or cost-effective way.
- Often debt securities, these assets can't typically be bought or sold on public exchanges and must trade OTC.
- Examples include savings bonds, shares in limited partnerships or privately held companies, and some complex derivatives products.
- In contrast, marketable securities include common stock, Treasury bills, and money market instruments, among others.
Understanding Non-Marketable Securities
Most non-marketable securities are government-issued debt instruments. You'll see common examples like U.S. savings bonds, rural electrification certificates, private shares, state and local government securities, and federal government series bonds. Those that are prohibited from resale, such as U.S. savings bonds, you have to hold until maturity.
Limited partnership investments are another example of a private security that may be non-marketable because reselling them is difficult. Private shares in a company that's not publicly traded are similar. This non-marketable nature isn't usually a problem for you as the owner unless you want to give up ownership or control of the company.
The U.S. government issues both marketable and non-marketable debt securities. The most widely held marketable ones are U.S. Treasury bills and Treasury bonds, which trade freely in the U.S. bond market.
The Rationale Behind Non-Marketable Securities
The main reason some debt securities are issued as non-marketable is to ensure stable ownership of the money they represent. You often buy these at a discount to their face value and redeem them for face value at maturity. Your gain as an investor is the difference between what you paid and the face value amount.
Marketable vs. Non-Marketable Securities
Marketable securities are those that trade freely in a secondary market. The key difference between marketable and non-marketable securities comes down to market value versus intrinsic or book value. Marketable securities have a market value that can fluctuate volatilely based on demand in the trading market, so they generally carry more risk than non-marketable ones.
Non-marketable securities aren't affected by demand changes in a secondary market, so they only have their intrinsic value, no market value. Depending on the security's structure, you can consider its intrinsic value as its face value, the amount payable at maturity, or its purchase price plus interest.
