What it means
Most investors think of shares and bonds that trade every day on an exchange, where there is always a visible price and a buyer. Non-marketable securities are the opposite: there is no open market, so the price is set by contract, by the issuer or by private negotiation.
Examples include government savings bonds sold directly to the public, shares in a private company and some employee share arrangements. The main business consequence is liquidity (how quickly an asset can be turned into cash without losing value).
A holder may be locked in for years, or may only be able to redeem at a set value on set dates. That is why non-marketable securities often offer a slightly higher return or other benefits, as compensation for the inconvenience.
Valuation is another challenge. With no daily market price, a finance team must estimate fair value using models, recent private deals or the issuer's own statements.
Auditors tend to look closely at these estimates because there is more room for judgement and for error. Non-marketable does not mean worthless or unsafe.
Some of these securities, such as direct government savings products, are very low risk but simply cannot be traded on. Others, such as stakes in start-ups, can be both illiquid and high risk.
Tax and legal rules can also differ. Transfer may need the consent of the issuer or other shareholders, and holders may have limits on who they can sell to.
Always read the terms before treating a holding as available cash. Disclosure also deserves attention.
Financial statements usually need to explain how non-marketable holdings were valued and what restrictions apply, so readers can judge how much of the reported balance could really be turned into cash in a hurry.
In practice
Real-world examples.
Example
A manufacturer buys $250,000 of savings bonds issued directly by a government for its long-term reserve. The bonds cannot be sold to another investor, so the finance director treats them as a locked-in reserve and not as cash. The cash-flow forecast therefore excludes the $250,000 until the bonds reach maturity.
Example
An engineer is paid partly in shares of a private start-up. She cannot sell them on an exchange, and the company can only buy them back once a year at a price set by the board. She values them in her personal plans at a cautious discount until a buyback date is announced.
Example
A family-owned retailer takes a 10% stake in a supplier. When the retailer wants to exit, the other shareholders have first right to buy, so the retailer must negotiate privately and may wait many months. The retailer's accountant carries the stake at a prudent value in the meantime.
Formula
Calculation
Illiquidity discount = (Estimated marketable value - Estimated non-marketable value) / Estimated marketable value
Suppose a company holds shares in a private firm that would be worth $500,000 if they could be freely traded. Because the shares cannot be sold without the board's approval, a valuer applies a lower value of $400,000. Discount = ($500,000 - $400,000) / $500,000 = $100,000 / $500,000 = 0.20, or 20%. The 20% reflects the cost of being unable to sell quickly, and the balance sheet would carry the holding at $400,000.Case study
Seen in the real world.
Brightwater Foods is a fictional mid-sized food distributor created for this illustration. Its treasurer invested $300,000 of surplus cash in a private note issued by a supplier, attracted by an interest rate above what the bank was paying.
Six months later a major customer went bankrupt and Brightwater suddenly needed $250,000 of cash. The note could not be sold on any market, and the supplier would only repay it early at a reduced value. The treasurer now splits surplus cash into an operating tier that must stay accessible and a longer-term tier where non-marketable products are allowed.
The board agreed that the lesson was about matching money to time. Anything needed within twelve months now stays in accounts it can withdraw from on demand, and the treasurer reports a liquidity ladder to the board each quarter showing what can be reached in a week, a month and a year.
Watch out
Common mistakes.
- Treating non-marketable securities as cash equivalents. If they cannot be turned into cash quickly at a known value, they do not belong in liquid reserves.
- Assuming a higher yield is free money. The extra return is payment for locked-in capital and harder valuation.
- Valuing a holding at cost indefinitely. Fair value should be reviewed regularly, especially when the issuer's circumstances change.
Questions
People also ask.
Are non-marketable securities always risky?
No. Some are issued by governments and carry very low credit risk, but they still cannot be traded freely.
Can a non-marketable security ever be sold?
Often yes, but only through a private sale, a buyback by the issuer or a redemption at set terms. These routes may be slow or come at a discount.
How are they shown in the accounts?
They are usually recorded as investments at cost or fair value, depending on the accounting framework, and are classified by how soon the entity expects to realise them.
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