What Is a Non-Security?
Let me explain what a non-security is: it's an alternative investment that isn't traded on a public exchange like stocks and bonds are. Think of assets such as art, rare coins, life insurance, gold, and diamonds—these all qualify as non-securities.
By definition, non-securities aren't liquid assets. You can't easily buy or sell them on demand because there's no exchange for trading them.
You'll also hear non-securities referred to as real assets.
Understanding Non-Securities
You should know that individual markets exist for non-securities, from auctions to private listings, but these are generally specialized sources. You can't purchase non-securities on a public exchange like the NYSE or NASDAQ.
High-net-worth investors often have comprehensive portfolios that include valuable non-security assets such as fine art, precious metals, and real estate. You might also buy funds that manage portfolios of real assets like gold, and these funds do trade on public exchanges.
Take the SPDR Gold Shares ETF as an example—its portfolio is fully invested in gold bullion. This ETF makes it easier for you to hold gold real assets in your portfolio.
Some personal financial assets, such as life insurance, could be called non-securities. However, non-security assets don't undergo an institutionalized process for public trading on exchanges. This makes them highly illiquid investments, unlike securities such as stocks, mutual funds, and bonds.
Key Takeaways
- Non-securities, also called real assets, are investments that are not available for purchase or sale on public exchanges.
- They may, however, be a component of an investment that trades publicly, such as an ETF.
- Diamonds and fine art are examples of non-security investments.
Valuation of Non-Securities
The valuation process for non-securities differs from that of securities. Market experts in each type of non-security typically appraise them to estimate their values. In some cases, you might need authentication and registration to support their use and potential sale.
These assets don't require the backing of an underwriter or bank, and they involve much less documentation and paperwork.
Personal Financial Assets as Non-Securities
Some personal financial assets, such as life insurance and annuities, could be considered non-securities.
You have the option to invest in these non-security assets through an insurance company. Life insurance and annuities are not publicly traded but are contractual agreements with a sponsoring company.
Life insurance and annuities require regular premium payments that build a portfolio offering a future payout. You can use life insurance plans to provide for dependents after a family member's death. Annuity plans may include life insurance provisions, but they're often used for retirement savings with consistent payouts scheduled after a target date.
That makes them assets, although they are not securities.
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