Non-Security: Definition, Markets, and Valuation

What is a non-security?

A non-security (also called a real asset) is an investment that is not bought or sold on public exchanges. Examples include fine art, rare coins, collectibles, precious metals (physical gold, silver), gems, and direct real estate holdings. These assets typically lack centralized markets and continuous public price quotes, making them less liquid than securities such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs).

How non-security markets work

• Trading venues: auctions, private sales, specialty dealers, consignments, and private listings.
• Price discovery is episodic—driven by occasional sales and auction results rather than continuous market quotes.
• Transactions often require authentication, provenance documentation, and expert appraisal.
• Some packaged financial products (for example, ETFs that hold physical gold) provide public-market exposure to real assets, even though the underlying holdings are non-securities.

Valuation

Valuing non-securities differs from valuing publicly traded securities:
– Appraisals: Experts assess condition, rarity, provenance, and comparable sales.
– Market comparables: Auction results and dealer pricing are primary references.
– Physical factors: Authenticity, certification, conservation status, and storage/insurance affect value.
– Illiquidity and transaction costs: Wide bid-ask spreads, buyer premiums, taxes, shipping, and insurance reduce net realizable value.
– No underwriter requirement: Sales typically involve less institutional paperwork than public securities, but may require specialized documentation for sale or export.

Personal financial products classified as non-securities

Some insurance-based financial products—such as traditional life insurance policies and certain fixed annuities—are contractual arrangements rather than publicly traded securities. They represent claims on an insurer’s obligations and are accessed through insurance companies rather than exchanges. (Note: some insurance-related products, like variable annuities, can be treated as securities.)

How investors gain exposure

• Direct ownership: Buying the physical asset through dealers, galleries, auction houses, or private sellers.
• Funds and ETFs: Some funds hold real assets or commodity bullion and trade publicly, lowering practical barriers to exposure (for example, gold ETFs).
• Fractional platforms and securitized offerings: Newer marketplaces allow fractional ownership or securitized claims on real assets, but these vary in regulation and liquidity.

Pros and cons

Pros:
– Diversification away from financial markets.
– Potential hedge against inflation (physical commodities, some real estate).
– Unique return drivers (scarcity, provenance, collector demand).

Cons:
– Illiquidity and higher transaction costs.
– Valuation uncertainty and episodic price discovery.
– Storage, insurance, authentication, and fraud risk.
– Limited regulatory transparency compared with public securities.

Key takeaways

• Non-securities are real assets not traded on public exchanges and are generally illiquid.
• Valuation relies on expert appraisal, comparables, and physical condition rather than continuous market pricing.
• Investors can access non-securities directly or indirectly via funds and other structured products; each route carries trade-offs in liquidity, cost, and transparency.