Non-Marketable Securities

Non-marketable securities are the ones which

cannot be bought or sold as they are not traded as
often in any secondary markets. These are
generally brought and sold privately in private
transactions or in OTC markets (over the counter).
It is difficult for the owner of the non-marketable
securities to find a buyer. Also, even some
marketable securities cannot be sold at all because
of many government rules and regulations
Why Some Securities are Non-Marketable?

The primary and most vital reason for securities

to be non-marketable is the need for stable
ownership of securities. These securities are
mainly sold at discount to their face value. The
gain for the investor is the discount between
the face value and the purchase price of the
security
 Example
• US saving bond
• Shares (private companies)
• Local government securities
• Certificates
• Federal Government bonds
• Government account series
 Cont…
Some of the securities are prohibited from re-selling
and have to be held until maturity like the US saving
bonds which are to be held until maturity. Another
example would be of private security like limited
partnership investments that cannot be sold due to
the difficulty of reselling. Non-marketability of the
shares of a private company is not a problem to the
owner because if he wants to sell he will have to
dilute the ownership and the control of the
company.
Characteristics of Non-Marketable Securities
 #1 – Highly illiquid:
• These securities are non-liquid and cannot be
converted into the cash till the maturity date
has passed.
• The maturity period is not defined. However,
as per the convention and GAAP rules, the
duration is typically longer and can range from
more three years to ten
 #2 – Transferable:
• Some of the non-marketable securities are not
transferable and hence have to be kept till
maturity. On the other hand, there are some
securities which are transferable and also used
as gifts.
• Illiquid and non-transferable are the
characteristics which complement each other.
 #3 – High Return
• These securities usually have long maturities
and are government backed. It is assured that
the investor will get principal back and the
rate of interest will be dependent on the
market rate. However, it is assured that the
return will be higher.
• The return of non-marketable securities is
higher than marketable securities.
Advantages:
• The US bonds can be purchased by investors
above the age of 18. These non-marketable
securities cannot be sold or brought and
cannot be traded on the secondary market.
• These securities also make great gifts. These
securities may be non-marketable but they
can be great purchased for others. For
example, one can purchase a bond which is
non-marketable for his child and they will be
able to access it after they turn 18
• One of the other important reason is that
these securities cannot be brought or sold.
This increases the quality of investments.
These bonds are considered the safest form of
investments which consumers can choose.
However, there is a limit to the amount an
individual can buy. These bonds have the low
principal risk and the return is guaranteed
• This means that you will not lose any money
and will always get paid higher than what they
have invested
Disadvantages:
• One of the main drawbacks of non-marketable
security is its lack of liquidity. If an investor
owns a bond which is non-marketable and he
is in quick need of cash then this bond cannot
be of any use to him since it cannot be sold till
the maturity date and the investor cannot
cash it to raise any additional cash
• As discussed earlier there is a guaranteed
return on these investments. However, there
is also an opportunity loss. Since the return is
guaranteed there is no additional scope of
getting more returns even if the market
performs well.