A non-security is an alternative investment that is not traded on a public exchange like stocks and bonds. Examples of non-securities include art, rare coins, life insurance, gold, and diamonds.
Non-securities, by definition, are not liquid assets, meaning they can’t be easily bought or sold on demand since no exchange exists for their trading.
Understanding Non-Securities
Individual markets exist for non-securities, ranging from auctions to private listings. However, these are typically specialized sources. Unlike stocks on exchanges like the NYSE or NASDAQ, non-securities can’t be bought on public exchanges.
Key Takeaways
- Non-securities, also known as real assets, are investments not available for purchase or sale on public exchanges.
- While they cannot be traded on public markets, components of non-securities can be part of publicly traded investments like exchange-traded funds (ETFs).
- Diamonds and fine art represent common non-securities.
High-net-worth investors might possess diverse portfolios that include non-securities such as artwork, precious metals, and real estate. Investors can also choose funds that manage real assets portfolios, which do trade on public exchanges.
An example is the SPDR Gold Shares ETF, which invests fully in gold bullion, lowering entry barriers for individuals looking to hold gold as a real asset within their portfolio.
While non-securities themselves do not undergo public trading, certain packaged investment offerings that comprise these assets can trade publicly.
Valuation of Non-Securities
The valuation of non-securities differs considerably from publicly traded assets. Market experts appraise these assets to estimate their values, and some non-securities may need authentication and registration.
Non-securities do not require the backing of an underwriter or bank, involving less documentation and paperwork compared to publicly traded securities such as stocks, mutual funds, and bonds.
Personal Financial Assets as Non-Securities
Personal financial assets like life insurance and annuities can also be considered non-securities. These assets typically form through contractual agreements with sponsoring companies and aren’t traded publicly.
Investors can purchase non-security assets like life insurance and annuities from insurance companies. Regular premium payments into these assets help build a payout portfolio for the future, providing for dependents in the event of death or offering consistent retirement savings payouts.
Thus, while life insurance and annuities are financial assets, their nature and handling distinguish them from publicly traded securities.
Related Terms: Securities, ETFs, High-net-worth Investors, Real Assets, Liquidity.
References
- State Street Global Advisors. “Welcome to SPDR Gold Shares”.
Get ready to put your knowledge to the test with this intriguing quiz!
---
primaryColor: 'rgb(121, 82, 179)'
secondaryColor: '#DDDDDD'
textColor: black
shuffle_questions: true
---
## What is a Non-Security?
- [ ] A financial instrument that represents ownership in a company
- [ ] A tradable financial asset like stocks or bonds
- [x] A financial asset that is not issued or traded in the form of securities
- [ ] A government bond with a guaranteed return
## Which one of the following is an example of a non-security asset?
- [x] Real estate
- [ ] Common stocks
- [ ] Corporate bonds
- [ ] Marketable securities
## Non-securities are typically associated with which of the following characteristics?
- [ ] High liquidity and easy tradability
- [x] Limited marketability and private ownership
- [ ] Issued by publicly-traded companies
- [ ] Registered with financial market regulators
## Which of the following is NOT a characteristic of non-securities?
- [ ] They are not subject to Securities and Exchange Commission (SEC) regulations
- [ ] They include assets like real estate, art, and commodities
- [ ] They do not represent ownership or debt in a corporation
- [x] They are easily traded on major exchanges
## How are non-securities typically valuated?
- [x] Based on appraisals or market comparables
- [ ] Through price discovery on public exchanges
- [ ] By their dividend yields
- [ ] By the performance of the issuing company
## Which statement about the risks of non-securities is TRUE?
- [ ] They have standardized risk profiles
- [x] They may have higher liquidity risk compared to securities
- [ ] They are less risky than publicly tradable securities
- [ ] They offer fixed dividends or interest
## In which scenario might an investor choose a non-security over a security?
- [ ] When seeking high liquidity assets
- [ ] When desiring regulation by financial authorities
- [x] When seeking to invest in a tangible asset like real estate
- [ ] When aiming for robust price transparency
## What kind of documentation is typically associated with non-securities?
- [x] Property deeds, bills of sale, or similar agreements
- [ ] Prospectuses and filings with securities regulators
- [ ] Certificates of stock or bond indentures
- [ ] Earnings reports and shareholder statements
## Can non-securities be part of a diversified investment portfolio?
- [ ] No, they cannot be included in an investment portfolio
- [ ] They should only be included in portfolios of conservative investors
- [x] Yes, they can provide diversification benefits
- [ ] Only when the overall market conditions are unfavorable
## Which of the following would likely NOT be included in the category of non-securities?
- [ ] Collectible art
- [ ] A private loan agreement
- [x] Preferred shares of a public company
- [ ] A precious metal like gold
