Non-Marketable Securities

Non-marketable securities are securities that are difficult to buy and difficult to sell in the market because they are not being traded in any major secondary market and are generally sold and bought through private transactions or over-the-counter. Some common non-marketable securities examples include shares held in private companies or limited partnerships, savings bonds, and money market deposit accounts (MMDAs).

Non-marketable securities are the ones that cannot be bought or sold as they are not traded as often in any secondary markets. Instead, these are generally bought and sold privately in private transactions or OTC markets. Therefore, it is difficult for the owner of such securities to find a buyer. Also, even some marketable securities cannot be sold because of many government rules and regulations.

Non-marketable securities are financial instruments that cannot be easily bought or sold in the open market due to restrictions or limitations imposed by regulatory authorities or the nature of the security itself. Unlike publicly traded securities that are readily tradable on stock exchanges, non-marketable securities lack the liquidity and accessibility associated with market transactions.

They often come with legal or contractual restrictions that prevent their sale or transfer for a certain period or under specific conditions. These restrictions are commonly found in employee stock options, restricted stock units, and certain government-issued bonds.

The lack of an active secondary market for non-marketable securities means that there is limited demand among investors. This can make it challenging to determine their fair market value or to find willing buyers when the need to sell arises.

Marketable securities encompass a wide range of financial instruments, including certain retirement plan assets, venture capital investments, privately issued bonds, and certain government savings bonds. These securities often require specialized processes to sell or transfer.

Investors who hold these securities may need to wait until the security becomes marketable or until restrictions are lifted before they can sell or transfer their holdings.

Non-marketable securities accounting serves various purposes, such as incentivizing long-term investment or supporting specific economic policies. While they may offer unique benefits, investors need to be aware of the limitations and potential illiquidity associated with these securities when making financial decisions.

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 a discount to their face value. The gain for the investor is the discount between the face value and the purchase price of the security.

Examples of Non-marketable securities are as follows –

Some securities are prohibited from reselling and have to be held until maturity, like US saving bonds, which are to be held until maturity. Another example would be private security like limited partnership investments that cannot be sold due to the difficulty of reselling. On the other hand, the non-marketability of the shares of a privately held company is not a problem for the owner because if he wants to sell, he will have to dilute the company's ownership and control.

The US issues both marketable as well as non-marketable securities. US treasury bonds and Treasury bills are freely traded in the US market

Let us understand the characteristics of some common non-marketable securities through the detailed explanation below.

#1 - Highly Illiquid

• It is the most important feature that makes a financial instrument.
• These securities are non-liquid and cannot be converted into 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 than three years to ten

#2 - Transferable

• Some of these securities are not transferable and have to be kept until maturity. On the other hand, some securities are transferable and used as gifts.
• Illiquid and non-transferable are the characteristics which complement each other.

The above two features are used to classify any security as non-marketable.

#3 - High Return

• These securities usually have long maturities and are government-backed. It is assumed that the investor will get the principal back, and the interest rate will depend on the market rate. However, it is assumed that the return will be higher.
• The return of non-marketable securities is higher than marketable securities.

Non-marketable securities accounting encompasses a variety of financial instruments that cannot be easily traded in the open market. Some common types include:

• Restricted Stock Units (RSUs): These are equity-based compensation instruments offered by companies to employees. RSUs grant employees the right to receive company shares at a future date, subject to vesting periods and other restrictions.
• Employee Stock Options: Companies grant employees the option to purchase company shares at a predetermined price within a specified timeframe. These options often come with vesting schedules and can only be exercised under certain conditions.
• Government Savings Bonds: These are debt securities issued by governments to raise funds. They usually offer fixed interest rates and have a specific maturity date. However, they may come with restrictions on when they can be redeemed or sold.
• Savings Bonds for Education: Governments may issue bonds specifically for funding education expenses. These bonds often have tax benefits but may have restrictions on their use and sale.
• Retirement Plan Assets: Some retirement plans, such as 401(k)s, may include non-marketable investments like company stock or certain alternative investments. These assets may have limitations on when and how they can be sold or transferred.
• Private Equity and Venture Capital Investments: These involve investing in private companies that are not publicly traded. These investments lack the liquidity of publicly traded stocks and may have lock-up periods or other restrictions.
• Certificates of Deposit (CDs): While CDs are tradable, some types, such as brokered CDs, can have restrictions on early withdrawals or resale before maturity.
• Convertible Securities: These securities, such as convertible bonds, can be converted into other securities, like common stock, under specific conditions. These conditions can restrict the marketability of the convertible security itself.

Now that we have laid the foundation of our understanding of the concept, let us dive deeper into its intricacies through the examples below.

Example #1

An investor is looking for investment in the long term. He has sufficient disposable income in hand. He wants to invest it in his daughter, who is currently five years old. His investment advisor has given him two options – US Treasury bond of thirty, sixty or ninety days, and a US Savings Bond. He has to select one of these.

Looking at the investor's preference and needs, he should select US savings bonds. US savings bonds are for the long term. They also can be transferred after the child becomes eighteen years old. He also has this amount and will not require it soon.

One more factor to consider here is that these bonds will provide a return with minimum risk. Even though US treasury bonds provide returns they are for short term like thirty, sixty, ninety days

If the investor selects this option, then he will have to renew these bonds after every maturity. Also, the features of these bonds do not satisfy his needs.

Examples #2

Treasury bonds with 20- or 30-year periods pay interests semi-annually. What makes it better than U.S. savings bonds is that they are marketable and can be sold to another party before its maturity.

However, the latter cannot be sold to another individual or entity. For investors who are risk averse and do not want to risk losing their money on the stock market, these options might be more attractive than stock market or cryptocurrency. However, they might not provide high enough returns if the goal is to save for long-term, for instance, retirement.

Let us understand the advantages of non-marketable securities accounting through the points below.

• Investors can purchase US bonds 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 greatly purchased by others. For example, one can purchase a bond for his child, and they will be able to access it after they turn 18
• One of the other important reasons is that these securities cannot be bought or sold. It increases the quality of investments. These bonds are considered the safest form of investment that consumers can choose. However, there is a limit to the amount an individual can buy. These bonds have low principal risks, and the return is guaranteed.
• It means that you will not lose any money and will always get paid higher than what they have invested.

Despite the advantages mentioned above, there are a few disadvantages of common non-marketable securities that can be understood through the discussion below.

• One of the main drawbacks of non-marketable security is its lack of liquidity. If an investor owns such a bond and if 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 for getting more returns, even if the market performs well.
• There are also non-marketable securities that are non-transferable. If an investor is looking to invest in this, they should make sure that they invest only disposable income that is not required until the maturity date. Since they cannot be sold or transferred, there is no way that they can be bought back when needed.

Let us understand the differences between non-marketable securities and marketable securities through the comparison below.

Non-Marketable Securities

• Non-marketable securities are financial instruments that cannot be easily bought or sold in the open market due to restrictions or limited demand.
• Restricted stock units (RSUs), employee stock options, government savings bonds, retirement plan assets, and private equity investments.
• Lack of liquidity due to restrictions or limited secondary market demand.
• Often come with restrictions on sale or transfer, such as vesting schedules or specific holding periods.
• Used for long-term incentives, retirement planning, or specialized investment strategies.
• Determining their fair market value can be complex due to limited market activity.

Marketable Securities

• Marketable securities are financial assets that can be easily bought and sold in the open market.
• Common stocks, corporate bonds, publicly traded mutual funds, and ETFs.
• Highly liquid, as they can be readily traded on established exchanges.
• Can be easily sold or transferred without significant restrictions.
• Offer immediate access to capital and investment opportunities.
• Their prices are readily available, and their value can be determined through market transactions.

This article has been a guide to what are Non-Marketable Securities. Here we explain its characteristics, types, examples, and compare it with marketable securities. You can learn more about financing from the following articles –

• Marketable Securities Examples
• Trading Securities Definition
• Available for Sale Securities
• Dilutive Securities