When making an investment in securities it is vitally important to understand the difference between marketable securities and non-marketable securities. If you are making an investment in order to resell that product to realize a profit you would not want to invest in non-marketable securities. On the other hand, if you are investing in your own future and are not interested in offering your investment on the open market then non-marketable securities might make the perfect investment.
Examples of Non-Marketable Securities
Since a non-marketable security cannot be transferred from one buyer to another, there are several types of government issues that fall into this category. Among these types of investment products would be US Savings Bonds, Rural Electrification Authority Securities (REA), State and Local Government Series Securities (SLGS) and Government Account Series (GAS). Also, it is extremely difficult to sell or transfer interests in Limited Partnerships so they are also considered to be non-marketable securities.
United States Savings Bonds
As a means of raising money for government projects the United States government issues savings bonds. These bonds cannot be transferred and they can only be redeemed by the person to whom they are issued. Sometimes they are bought in the name of another person as a gift and in that case they could only be redeemed by the recipient. If a child is the owner then the parent can cash in the bond, but they may not be sold or transferred to another owner once they have been purchased.
Rural Electrification Authority Securities
These are securities issued by government authorities, usually state and/or local governments, looking to raise revenue to provide electricity to rural areas. For example, if Tennessee wanted to raise money to provide electricity to outlying regions they would issue Rural Electrification Authority (REA) Securities which cannot be sold on the open market and can only be cashed in by the person who holds the security.
State and Local Government Series Securities
State and Local Government Series (SLGS) Securities are similar in nature to REA Securities in that monies raised are used for any one of a number of government projects. As with any other government issued security or bond they are non-transferable and are therefore not to be sold on the open market.
Government Account Series System
This particular type of investment product is actually a way of raising capital to pay government debt. A Government Account Series security is usually issued within trust funds that are managed by the government. As such they are considered as non-transferable and can only be cashed in (redeemed) by the holder of the security within the fund.
Pros and Cons of Non-Marketable Securities
One of the things which many people don’t like about non-marketable securities is their lack of liquidity. If you have need of cash quickly and the security or bond you hold is not at or beyond the maturity date then you cannot cash them in to raise that cash. However, there is a benefit to non-transferable government issued securities and bonds in that they are guaranteed issue. This means that you will get no less than what you paid for them and will not lose money. It may be possible to make more money in another way, but you also are exposed to greater risk for loss, therefore there are both advantages and disadvantages to be considered.
If you are going to invest in non-marketable securities which are non-transferable then it is suggested that you only use disposable income that will not be missed until the maturity date on the bond or security. Since they cannot be sold or transferred you will be out of luck if you need the money in the mean time.