What is a non-marketable security?
A non-negotiable security is generally a debt security that is difficult to buy or sell due to the fact that it is not traded on major secondary market exchanges. These securities, if traded on a secondary market, are generally only bought and sold through private transactions or on an over-the-counter (OTC) market. For the holder of a non-negotiable security, it can be difficult to find a buyer and some non-negotiable securities cannot be resold at all because government regulations prohibit any resale.
Explanation of non-marketable securities
Most non-marketable securities are government-issued debt securities. Common examples of non-marketable securities include US savings bonds, rural electrification certificates, private stocks, state and local government bonds, and federal series bonds. Non-marketable securities that are prohibited from resale, such as US savings bonds, should be held until maturity.
Investments in limited partnerships are an example of a private security which may be non-marketable due to the difficulty of reselling. Another example is that of private shares held by the owner of a business that is not listed on the stock exchange. The fact that these shares are not negotiable is generally not an obstacle for the owner, unless he wishes to give up ownership or control of the company.
The United States government issues negotiable and non-negotiable debt securities. The most widely held marketable securities are US Treasury bills and Treasury bills, both of which are freely traded on the US bond market.
The rationale for non-marketable securities
The main reason why certain debt securities are deliberately issued as non-negotiable is the perceived need to ensure stable ownership of the money that the security represents. Non-marketable securities are frequently sold at a discount at their nominal value and redeemable at their nominal value at maturity. The gain for an investor is then the difference between the purchase price of the security and its nominal value.
Difference between marketable and non-marketable securities
Marketable securities are those which are freely traded on a secondary market. The main difference between marketable securities and non-marketable securities revolves around the concepts of market value and intrinsic or book value. Marketable securities have both a market value, which is subject to potentially volatile fluctuations depending on changes in demand levels for securities on the stock market. Thus, marketable securities generally carry a higher level of risk than non-marketable securities.
However, non-marketable securities are not subject to changes in demand on a secondary market and therefore have only their intrinsic value, but no market value. The intrinsic value of a non-negotiable security, depending on the structure of the security, can be considered as its nominal value, the amount payable at maturity or its purchase price plus interest.