Definition
A non-marketable security is a type of investment that cannot be bought or sold on the open market. They are typically issued by governments or businesses and sold directly to investors. Owing to their lack of marketability, transferring ownership tends to be more complex and they could be less liquid than marketable securities.
Phonetic
The phonetic pronunciation of “Non-Marketable Security” is:Non-Marketable: /nɑn-mɑr-kɪ-tə-bəl/Security: /sɪˈkjʊrɪti/
Key Takeaways
Sure, here are the three main takeaways about Non-Marketable Security:
- Non-Marketable Securities: These are securities that cannot be easily sold or exchanged for cash without a significant loss in value. They are typically issued by the government and generally have low risk.
- Low Liquidity: The prominent feature of non-marketable securities is their low liquidity. Their market isn’t like a traditional stock exchange, therefore they cannot be sold quickly.
- Investment Strategy: These securities are often used as long-term investments since they typically have lower returns than marketable securities but offer a lower risk factor. They can be an effective way to diversify an investment portfolio.
Importance
Non-Marketable Security is a vital term in business/finance because it signifies a category of securities that are not readily tradeable or sellable in the public marketplace due to restrictions imposed by laws or regulations. These securities often provide a higher return to compensate for their illiquidity, as they are typically retained until maturity. Understanding the concept of non-marketable securities is crucial for investors and financial professionals, especially while structuring investment portfolios or assessing the financial health of a company. These securities can impact a company’s liquidity and the valuation of its assets. Depending on the investor’s liquidity needs and risk tolerance, non-marketable securities can be an opportunity for enhanced yields or a potential risk requiring careful management.
Explanation
Non-Marketable Security is an instrument that represents a financial investment, typically debt or equity, which cannot be easily sold or exchanged for cash due to constraints such as governmental regulations or the absence of a secondary market. These securities are typically held to maturity and are often issued by entities like the government, private companies, or individuals. The primary purpose of Non-Marketable Securities is to offer a source of financing to issuers by attracting investors who are seeking long term, typically risk-averse, investments. In cases such as Treasury bills issued by the government, non-marketable securities can help manage national debt and finance government projects. For private companies or individuals, non-marketable securities can provide critical financing for projects or operations that may fall outside of the scope of traditional financial markets. In return, the investors receive either equity or a fixed income depending on the nature of the contract. Because of their illiquid nature, non-marketable securities often present lower risk and offer higher returns in comparison to marketable securities, making them an appealing option for certain types of investors.
Examples
1. Private Company Shares: Shares of a private company are considered non-marketable securities because they are not traded on the public exchange. The transfer of these shares often requires permission from the company’s board of directors and hence, it is not easy to sell or buy these securities. 2. Government Savings Bonds: Certain government savings bonds are non-marketable because their sale is restricted to the original owner. They cannot be sold to other investors in an open market and can only be cashed in by the bond owner back to the government.3. Restricted Stocks: Restricted stock is a type of non-marketable security often issued to corporate executives and other insiders as part of their compensation. These stocks cannot be sold in the open market until specific conditions or vesting periods are met.
Frequently Asked Questions(FAQ)
What is a Non-Marketable Security?
Non-marketable security refers to an investment security that cannot be freely bought or sold on public exchanges or over-the-counter markets. These securities are often issued by government entities and typically trade at a discount.
What are examples of Non-Marketable Securities?
Examples of non-marketable securities include U.S. savings bonds, rural electrification certificates, private shares, and state and local government securities.
Why are some securities non-marketable?
Securities may be non-marketable due to regulations, lack of demand, or because the issuing entity chose to maintain greater control over its securities. They are often regarded as low-risk, long-term investments.
How are Non-Marketable Securities valued?
Non-marketable securities are valued based on their face value or the amount they will be worth at maturity. They are not subject to market fluctuations like marketable securities.
Can Non-Marketable Securities be converted to Marketable Securities?
In some cases, non-marketable securities can be converted into marketable securities, depending on the terms set by the issuing entity. However, this is not always possible.
How are Non-Marketable Securities traded?
Non-marketable securities cannot be bought or sold on the open market. Instead, they are typically redeemed by the issuer at the security’s maturity date.
How are Non-Marketable Securities different from Marketable Securities?
The key difference lies in the liquidity and marketability. Marketable securities can be bought and sold freely in the marketplace whereas non-marketable securities cannot be.
What are the risks of investing in Non-Marketable Securities?
The primary risk with non-marketable securities is their lack of liquidity, making them difficult to sell quickly if necessary. They might also offer lower returns compared to marketable securities. However, they are usually considered low-risk investments.
Who typically invests in Non-Marketable Securities?
Non-marketable securities are often favored by conservative investors seeking a low-risk, long-term investment. They are a popular choice for retirement funds, pension funds, or governmental bodies.
Related Finance Terms
- Illiquid Asset
- Private Investment
- Restricted Stock
- Government Savings Bond
- Convertible Security
Sources for More Information
