Non-Marketable Security

A non-marketable security, typically a debt security, that is difficult to buy or sell due to the fact that they are not traded on any normal, major secondary market exchanges. Such securities, if traded in any secondary market, are usually only bought and sold through private transactions or in an over-the-counter (OTC) market. For the holder of a nonmarketable security, finding a buyer can be difficult, and some nonmarketable securities cannot be resold at all because government regulations prohibit any resale.

Most nonmarketable securities are government-issued debt instruments. Common examples of nonmarketable securities include U.S. savings bonds, rural electrification certificates, private shares, state and local government securities, and federal government series bonds. Nonmarketable securities that are prohibited from being resold, such as U.S. savings bonds, are required to be held until maturity.

Limited partnership investments are an example of a private security that may be nonmarketable due to the difficulty of reselling. Another example is private shares held by an owner of a company that is not publicly traded. The fact that these shares are nonmarketable is not usually an obstacle for the owner unless he wishes to relinquish ownership or control of the company.

The U.S. government issues both marketable and nonmarketable debt securities. The most widely held marketable securities include U.S. Treasury bills and Treasury bonds, both of which are freely traded in the U.S. bond market.

The primary reason that some debt securities are purposely issued as nonmarketable is a perceived need to ensure stable ownership of the money the security represents. Nonmarketable securities are frequently sold at a discount to their face value and redeemable for face value at maturity. The gain for an investor is then the difference between the purchase price of the security and its face value amount.

Marketable securities are those that are freely traded in a secondary market. The principal difference between marketable and nonmarketable securities revolves around the concepts of market value and intrinsic, or book, value. Marketable securities have both a marketable value, one which is subject to potentially volatile fluctuation in accordance with the changing levels of demand for the security in the trading marketplace. Thus, marketable securities generally carry a higher level of risk than nonmarketable securities.

Nonmarketable securities, however, are not subject to the demand changes in a secondary trading market and, therefore, have only their intrinsic value, but no market value. The intrinsic value of a nonmarketable security, depending on the structure of the security, can be considered as either its face value, the amount payable upon maturity or its purchase price plus interest.