Non-marketable securities are types of financial assets that cannot be easily bought or sold on public exchanges. These securities are typically issued by government entities or private corporations and are designed to be held by the original purchaser until maturity. Understanding non-marketable securities is important for investors and finance students as it highlights the differences in liquidity and marketability compared to marketable securities.
Key Characteristics of Non-Marketable Securities
- Lack of Liquidity: Non-marketable securities cannot be quickly or easily converted into cash. They do not trade on public exchanges, making it difficult for the holder to sell them before maturity.
- Restricted Transferability: These securities often come with restrictions on transfer, meaning they cannot be sold or transferred to another party without permission from the issuer.
- Long-term Investment: Non-marketable securities are generally designed to be held for the long term. Investors in these securities often plan to keep them until they mature.
- Government or Private Issuance: Non-marketable securities are commonly issued by governments or private companies for specific purposes. They are often used to raise funds without going through public markets.
Common Examples of Non-Marketable Securities
- U.S. Savings Bonds: These are issued by the U.S. Department of the Treasury and are a common example of non-marketable securities. Savings bonds are designed to be held by the purchaser until they mature, typically ranging from 1 to 30 years.Example: An individual buys a U.S. Savings Bond as a safe investment for their child’s education fund. The bond cannot be sold on the open market and must be redeemed directly through the U.S. Treasury.
- Private Company Stocks: Shares in privately held companies are also non-marketable because they are not listed on public stock exchanges. These shares are usually held by a small group of investors and cannot be easily sold.Example: An employee receives stock options as part of their compensation from a private tech startup. These shares cannot be traded publicly and can only be sold if the company decides to go public or is bought by another company.
- Municipal Bonds: Certain municipal bonds, especially those issued for specific projects, can be non-marketable. These bonds are intended for specific investors and may come with restrictions on transfer.Example: A local government issues non-marketable municipal bonds to finance the construction of a new public library. These bonds are sold to local residents who intend to hold them until the project is completed and the bonds mature.
Advantages of Non-Marketable Securities
- Stable Investment: Non-marketable securities are often considered stable investments because they are not subject to market fluctuations. This can make them attractive for risk-averse investors.
- Predictable Returns: These securities typically offer fixed interest rates or returns, providing a predictable income stream for investors.
- Government Backing: Many non-marketable securities, like U.S. Savings Bonds, are backed by the government, making them very secure.
- Tax Benefits: Some non-marketable securities offer tax advantages. For instance, interest earned on U.S. Savings Bonds can be exempt from state and local taxes.
Disadvantages of Non-Marketable Securities
- Lack of Liquidity: The biggest drawback is their lack of liquidity. Investors cannot easily sell these securities if they need cash quickly.
- Lower Returns: Because they are low-risk, non-marketable securities often offer lower returns compared to marketable securities.
- Inflation Risk: The fixed returns on these securities may not keep up with inflation, potentially reducing the purchasing power of the returns over time.
- Limited Growth Potential: Non-marketable securities do not benefit from market growth, so investors miss out on potential capital gains that marketable securities might provide.
How Non-Marketable Securities Compare to Marketable Securities
- Marketable Securities: These include stocks, bonds, and other financial instruments that can be easily bought and sold on public exchanges. They offer higher liquidity and the potential for higher returns but come with greater risk due to market volatility.
- Non-Marketable Securities: These are less liquid, safer investments with predictable returns, suitable for long-term holding. They are ideal for conservative investors looking for stability rather than growth.
Understanding non-marketable securities helps investors diversify their portfolios with low-risk, stable investments. While they offer security and predictability, the trade-off is lower liquidity and potentially lower returns. Balancing non-marketable and marketable securities in a portfolio can help achieve a mix of stability and growth, catering to different financial goals and risk appetites.