Key Takeaways
- Cannot be easily sold on public exchanges.
- Often illiquid and non-transferable until maturity.
- Suitable for long-term holding, limited quick cash access.
What is Non-Marketable Security?
A non-marketable security is a financial instrument that cannot be easily bought or sold on public exchanges or major secondary markets due to restrictions or limited liquidity. Unlike marketable securities, these assets require private transactions or hold lock-up periods that restrict immediate resale.
These securities often serve long-term investment goals, as converting them to cash quickly is challenging.
Key Characteristics
Non-marketable securities share distinct features that affect their liquidity and transferability:
- Illiquidity: They are difficult to sell quickly, often requiring private deals or over-the-counter transactions.
- Non-transferability: Many are registered to individuals, such as savings bonds tied to a Social Security number, preventing sale or gifting before maturity.
- Regulatory restrictions: Lock-up periods and governmental rules limit trading options.
- Long-term holding: Investors must be prepared to keep these securities until maturity or specific conditions are met.
How It Works
Non-marketable securities operate outside of public trading venues, making them less liquid and more difficult to value compared to marketable securities like Treasury bills or bonds traded on exchanges. You typically acquire these securities through direct purchase from the issuer or as part of employee compensation plans.
Because they lack a secondary market, pricing depends on issuer valuations or redemption terms. For example, U.S. savings bonds accrue interest over time but cannot be sold to other investors, making them ideal for conservative, long-term savings.
Examples and Use Cases
Non-marketable securities appear in various forms across different sectors, serving specific investment and regulatory purposes:
- Savings Bonds: U.S. savings bonds are a classic example, registered to individuals and non-transferable until maturity.
- Private Equity and Restricted Stock: Employee stock options or private company shares often have lock-up periods, limiting immediate sales.
- Non-traded REITs and BDCs: These investment vehicles lack public exchange listings, exposing investors to illiquidity and valuation challenges.
- Airlines: Companies like Delta may issue restricted stock units to employees that are non-marketable until certain conditions are met.
- Bonds: For bond investors seeking liquidity, marketable bonds like those on the BND ETF contrast sharply with non-marketable debt instruments.
Important Considerations
When investing in non-marketable securities, you should weigh the trade-offs between potential higher yields and limited liquidity. These securities may suit risk-averse investors focused on long-term growth or preservation but can be problematic if you require quick access to funds.
Evaluating the security’s terms, such as maturity and transfer restrictions, is critical. Additionally, understanding the risks of valuation opacity and potential fraud—especially in non-traded funds—is essential. Diversifying with liquid assets, including marketable securities, can help balance these risks.
Final Words
Non-marketable securities offer long-term investment opportunities but come with limited liquidity and transfer restrictions. Evaluate your cash flow needs carefully before committing, and consider consulting a financial advisor to assess how these assets fit into your overall portfolio.
Frequently Asked Questions
A non-marketable security is a financial instrument that cannot be easily bought or sold on public exchanges or major secondary markets due to restrictions or lack of liquidity. These securities often require private transactions and are typically held long-term.
Non-marketable securities are illiquid and often non-transferable, meaning they can't be traded freely on public exchanges, unlike marketable securities such as stocks or Treasury bills that trade easily and offer quick liquidity.
In most cases, non-marketable securities are restricted from being sold or transferred before they mature. Many are registered to specific individuals and require private deals or issuer approval to transfer.
Typical examples include U.S. Savings Bonds, private company shares, non-traded REITs, restricted stock units, money market deposit accounts, and certain certificates of deposit with withdrawal penalties.
Investors may opt for non-marketable securities for benefits like higher yields, principal guarantees, or portfolio diversification, especially when pursuing long-term, risk-averse investment strategies.
These securities carry risks such as illiquidity, difficulty in finding buyers, potential volatility, and fraud risks, particularly in non-traded funds or private investments.
No, non-marketable securities are generally not suitable for investors who might need immediate cash because they are hard to sell quickly due to transfer restrictions and limited market demand.
