A non-security is an alternative investment that is not traded on a public exchange as stocks and bonds are. Assets such as art, rare coins, life insurance, gold, and diamonds all are non-securities. Non-securities by definition are not liquid assets. That is, they cannot be easily bought or sold on demand as no exchange exists for trading them. Non-securities also are known as real assets.
Valuation of Non-Securities
The valuation process for non-securities also differs. Market experts in each type of non-security typically appraise them to estimate their valuations. In some cases, non-securities may require authentication and registration to support their use and potential sale.
These assets, however, do not require the backing of an underwriter or bank and involve much less documentation and paperwork.
Personal Financial Assets as Non-Securities
Some personal financial assets such as life insurance and annuities could be considered non-securities.
Investors have the option to invest in these non-security assets through an insurance company. Life insurance and annuities are two types of non-security assets that are not publicly traded but rather contractual agreements made with a sponsoring company.
Life insurance and annuities require regular premium payments that help to build out a portfolio that offers a payout in the future. Life insurance plans can be used to provide for dependents following the death of a family member. Annuity plans may also offer provisions for life insurance. However, they are often used as vehicles for retirement savings with consistent annuity payouts scheduled to follow a targeted payout date.
Attributes of a Non-Marketable Security
Some types of securities may not be transferable to other individuals and may be required to be held by the registered owner until maturity. For example, U.S. Saving Bonds are required to be held until maturity.
One of the most important features is that the security has no available market for which to trade or sell it. Since there is insufficient liquidity in the market for such security, in many cases, it has to be held until maturity.
Lack of marketability and illiquidity are attributes that make investors require a higher rate of return on non-marketable securities.
The Need for Non-Marketable Securities
Non-marketable securities are primarily issued to ensure stability in ownership of the securities. Other reasons for issuing such a type of securities include the need for a long-term investment horizon.
Non-marketable securities are often issued at a lower price than face value, with the securities being redeemable at face value on maturity. The variance between the face value and issue price of the security represents a higher yield or return for the investor.
Examples of a Non-Marketable Security
Common examples include rural electrification certificates, state and local government securities, private shares, and federal government series bonds.
A limited partnership investment is an example of private security that could be non-marketable due to the difficulties concerning reselling. Another example is the private stock owned by the owner of a company which is not publicly traded.
The fact that such securities are non-marketable is not generally an obstacle to the owner unless they decide to give up ownership or control of the company.