Negotiable or redeemable

A security could be negotiable or redeemable depending on how an investment is bought or sold.

Common stock is negotiable, which means it can be bought and sold among investors who are “negotiating” prices. Investors who purchase common stock are company owners for as long as they hold those shares. Stockholders may choose to sell their shares at any time. Once shares are liquidated, the investor locks in their gain or loss and no longer participates in the successes or failures of the issuer.

Buying investors purchase negotiable securities in the market from other selling investors. If you wanted to buy shares of Home Depot stock, you would purchase them in the secondary market from another investor, not directly from Home Depot.

If a security isn’t negotiable, it’s likely redeemable. While common stock isn’t redeemable, there are a few securities you’ll learn about in future chapters that are (like mutual funds and unit investment trusts). A redeemable security is bought and sold directly with the issuer, not with other investors in the market. For example, investors purchase Vanguard funds directly from Vanguard. When Vanguard fund investors move to liquidate their shares, they redeem (sell) their shares with Vanguard (Vanguard “cashes out” the shares).

Here’s a quick video discussing the differences between negotiable and redeemable securities: