What is Non-Marketable Security?

604 reads · Last updated: December 5, 2024

A non-marketable security is an asset that is difficult to buy or sell due to the fact that they are not traded on any major secondary market exchanges. Such securities, often forms of debt or fixed-income securities, are usually only bought and sold through private transactions or in an over-the-counter (OTC) market.For the holder of a non-marketable security, finding a buyer can be difficult, and some non-marketable securities cannot be resold at all because government regulations prohibit any resale. A non-marketable security may be contrasted with a marketable security, which is listed on an exchange and easily traded.

Definition

Non-marketable securities are assets that are difficult to buy or sell because they are not traded on any major secondary market exchanges. These securities are typically in the form of debt or fixed-income securities and can usually only be bought or sold through private transactions or over-the-counter (OTC) markets. For holders of non-marketable securities, finding a buyer can be challenging, and some non-marketable securities cannot be resold at all due to government regulations prohibiting any resale. Non-marketable securities contrast with marketable securities, which are listed on exchanges and are easy to trade.

Origin

The concept of non-marketable securities evolved with the development of financial markets. Early financial markets relied heavily on face-to-face transactions and private agreements, making many securities non-tradable in public markets. As exchanges were established and developed, the concept of marketable securities emerged, while non-marketable securities retained their privacy and limited liquidity.

Categories and Features

Non-marketable securities are primarily divided into two categories: private placement securities and over-the-counter (OTC) securities. Private placement securities are typically issued directly by companies to specific investors and are not traded on public markets. OTC securities are traded in the OTC market, featuring lower liquidity and less price transparency. The main characteristics of non-marketable securities include low liquidity, high transaction costs, and information asymmetry.

Case Studies

A typical case involves private placement bonds issued by certain companies, which are not traded on public markets but sold through private agreements to institutional investors. Another example is the stocks of some small businesses, which may be traded on the OTC market but have low trading volumes and high price volatility due to lack of market demand.

Common Issues

Investors dealing with non-marketable securities often face issues such as liquidity risk and pricing difficulties. Since these securities are not traded on public markets, investors may find it hard to locate buyers, leading to liquidity risk. Additionally, the lack of market price references can result in pricing difficulties, requiring investors to rely on valuation models or expert opinions.

Suggested for You

Continuous Compounding

Continuous compounding is the mathematical limit that compound interest can reach if it's calculated and reinvested into an account's balance over a theoretically infinite number of periods. While this is not possible in practice, the concept of continuously compounded interest is important in finance. It is an extreme case of compounding, as most interest is compounded on a monthly, quarterly, or semiannual basis.

Interest Expense

Interest Expense refers to the cost incurred by a company for borrowed funds during a specific period. These borrowed funds can include bank loans, bonds, commercial paper, etc. Interest expense is typically listed on the company's income statement as part of financial expenses. It reflects the cost that the company pays for raising funds and directly impacts the net profit and cash flow. Interest expense is part of the operational costs of a business, and effective debt management can help optimize the capital structure and reduce financing costs.

Interest Rate Collar

An interest rate collar is a relatively low-cost interest rate risk management strategy that uses derivatives to hedge an investor's exposure to interest rate fluctuations.

Swap Rate

The Swap Rate, also known as Interest Rate Swap (IRS), is a financial derivative instrument that allows two parties to exchange their respective interest rate payments. Typically, one party pays a fixed interest rate while the other pays a floating interest rate. The primary purpose of an interest rate swap is to manage interest rate risk, optimize financing costs, or achieve asset-liability matching. For example, a company might want to convert its floating rate debt into fixed rate debt to lock in future interest payments. Interest rate swaps are widely used by banks, corporations, and financial institutions and are a crucial tool for risk management in modern financial markets.

Interest Rate Swap

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.A swap can also involve the exchange of one type of floating rate for another, which is called a basis swap.

Interest Rate Risk

Interest Rate Risk refers to the risk that changes in market interest rates will cause fluctuations in the value of financial assets or liabilities. This risk primarily affects bonds, loans, and other fixed-income securities. For investors holding fixed-income assets, an increase in interest rates will lead to a decrease in the market value of these assets, while a decrease in interest rates will increase their market value. Banks, insurance companies, and other financial institutions typically manage and hedge interest rate risk through interest rate swaps, options, and other derivatives. Effective management of interest rate risk is crucial for maintaining the stability and profitability of financial institutions.