You might be familiar with marketable securities such as stocks, bonds, ETFs, even options and futures which can be traded on exchange markets are called marketable securities. Beyond marketable securities, investors also consider non marketable securities to invest, though hardly as common as marketable ones. 

Non marketable securities whose names speak for itself are not publicly traded on any “official” exchange markets. Unlike marketable security holders, government regulations limit the transactions of this type of security to a certain extent.

To maximize returns as well as diversify investment portfolio, it’s important to understand both marketable and non marketable securities, and the difference of the two to have better options of investment in future. 

1. What are Non Marketable Securities?

Definition: Non marketable securities can be broadly defined as securities that are not listed and traded officially on any secondary exchange markets. Instead, investors who want to buy or sell this type of securities have to trade through private transactions or on the OTC market (Over-the-counter). 

Investors/individuals purchasing non marketable securities are regarded as primary investors. Trading a few certain sorts of non marketable securities are under prohibition of government rules and regulations. For this reason, finding a new buyer (also called secondary investors/buyers) for non marketable securities seems harder compared with marketable ones. 

Non marketable securities are specific types of debt securities or Treasury Bonds issued by government or local authorities. Several kinds of common non marketable securities are: Life Insurance, Individual Bank Accounts, US Saving bonds, State and Local Government Series Securities (SLGS), Government Account Series Securities (GAS), etc. In which, US Saving bonds are regulated by rules and holders are not allowed to trade with anyone but the government until maturity. 

However, this doesn’t mean the government only issues non marketable securities, they issue both, take T- Notes, T-Bills of the US as examples of governmental marketable securities. Similar to it, corporations which don’t go public also issue private shares (private stocks) over the counters. 

2. What are Characteristics of Non Marketable Securities?

Starting your own hedge fund

These are characteristics of non marketable securities:

Lowly liquid: Non Marketable Securities cannot be converted into cash because of its agreements and stipulations clearly written when investors buy it. Also, it’s hard to find a secondary purchaser, making those securities highly non liquid compared with marketable securities. Non marketable securities are also unnegotiable. A few types of non marketable securities can last 5- 10 years, requiring holders holding until the maturity date to receive cash back. 

Not freely transferable: Non marketable securities are also not transferable until maturity. This sort of characteristic seems to resemble “low liquid” since no transactions tied to several types of non marketable securities are allowed to trade on any secondary exchange markets. Those, however, can be used as gifts to others. 

High return and Low risk: To make up for limitations, non marketable securities surely carry less risks than marketable ones. Beyond that, backed and guaranteed by trustworthy organizations such as the government, local authorities, non marketable securities give investors stable and higher returns compared with marketable securities.

Interest payment: Holders of non marketable securities enjoy interest payments during the life of the types of held non marketable securities if possible. Though investors are unable to make money based on trading these securities, interest payments can help make up for the lack of flexibility. 

No market value: There are hardly ways to calculate the market value of non marketable securities, which is opposed to marketable securities.  

3. Non Marketable Securities vs. Marketable Securities: A Comprehensive Comparison

Investment Thesis

As said, the most basic point here is marketable securities have the distinction of being traded as many times as investors want to while non marketable securities don’t really carry that privilege. 

Beyond that, the value of marketable securities are set by market conditions and investor’s expectation. In contrast, the issuers of non marketable securities often issue non marketable securities at a discount. When the maturity date comes, holders bring non marketable securities to issuers to redeem at the par value. For marketable securities, demands in the market can drive the price of securities up or down. Even sometimes, the value price fails to reflect the fundamentals of a business or a stick itself. However, during volatile periods, savvy investors holding marketable securities can make a lot of money based on appropriate strategies. 

In terms of finance, many corporations use marketable securities as collateral to secure financing from banks, while holders of non marketable securities can’t due to regulations and rules. 

Infographic: 2021 Non Marketable Securities 3

Let’s take a glance at the table for detailed differences between the two types of securities:

 

Non Marketable Securities

Marketable Securities

Simple Definition

Non Marketable Securities are mostly debt securities issued by governments (Specific types of Treasury bonds) or Corporations. Due to strict regulations and rules, these securities are rarely traded on any secondary exchange markets.

Marketable Securities are negotiable and transferable securities which may be sold and on the secondary market.

Example

US Saving bonds, Rural Electrification Certificates, State and Local Government Series Securities (SLGS), Government Account Series Bonds (GAS), Private Shares

Stocks, Treasury bonds, Exchange-traded funds, Derivatives, 

Issue Price

Primary holders purchase non marketable securities at a discount. 

Depends. The issue price of stocks might be different from that of bonds and other marketable securities.

Issuer

Often Government. A few companies issue private shares (not go public), which can be bought and sold over the counter (OTC)

Corporates can issue bonds and stocks if they need capitals for their operations. Governments issue bonds to raise money for public purposes such as building infrastructures, social welfare, etc. 

Liquidity

Lower liquidity compared with Marketable securities because investors cannot approach them as easily as marketable securities

Higher liquidity

Risk

Lower risks

Mostly higher risks compared with non marketable securities since many types of marketable securities are not guaranteed by trustworthy organizations. For example, bonds issued by companies with weak financial health are risky to non-savvy investors. (*)

Return

High

Can be higher or lower

Transaction Volume

Lower

Higher

Describe by graph

The graphs below illustrate the principal and cumulative interest as of December 2020 of Marketable Securities and Non Marketable Securities.

Non marketable securities

Usually, in December and June, non marketable interest will increase owing to the interest payments according to semiannual payments (it’s common in the US). 

The transaction volume (illustrated by Principal) of Marketable securities have outperformed  that of non marketable securities as of December 2020. The returns (illustrated by interests) of non marketable securities are quite attractive against the money investors have to put into compared to that of marketable securities. 

4. Advantages and Disadvantages of Holding Non Marketable Securities

Should investors put money into non marketable securities? Non marketable securities have certain benefits and drawbacks as follows:

4.1 Advantages:

Stable return: Non marketable securities offer stable and higher rates of return for holders. Explained above, these securities are backed by governments and the compulsory holding periods often take longer than marketable ones. The lure of higher returns associated with lower risks explains why many investors with free money to flock into non marketable securities. 

No volatility: Non marketable securities seem not to be influenced by market fluctuations, or in other words, it looks to be resistant to any volatilities of the market. This is because these securities are not traded on secondary markets.

Safe investment: Investors agree to hold non marketable securities in a long time because of their safety. Investors with a lot of idle money can consider investing in these securities because they definitely won’t lose money. 

4.2 Disadvantages

Beside benefits attached, there are still disadvantages of holding this type of security:

Highly illiquid: The characteristic is its disadvantages when cash is needed. Non marketable securities cannot be quickly converted into cash as marketable securities, leading to the cash shortage if the investors happen to need money instantly. It’s advisable that just a fraction of your disposable income should be in non marketable securities. 

Opportunity Cost: There is likelihood that volatile marketable securities could produce higher returns for investors than marketable securities, most of which they have to hold until maturity.  In fact, when the market performs well, returns from marketable securities are likely to soar up in a short period of time, compared to non marketable ones. 

Investment Banking Career Planning Tool