A security can be negotiable or redeemable, depending on how investors buy and sell it.
Common stock is negotiable, meaning investors can buy and sell shares with each other by agreeing on a price. When you buy common stock, you become an owner of the company for as long as you hold the shares. You can sell your shares at any time. Once you liquidate (sell) your shares, you lock in your gain or loss and no longer participate in the issuer’s future successes or failures.
When you buy a negotiable security, you typically buy it from another investor who is selling. For example, if you wanted to buy shares of Home Depot stock, you’d purchase them in the secondary market from another investor - not directly from Home Depot.
If a security isn’t negotiable, it’s likely redeemable. Common stock isn’t redeemable, but some securities you’ll learn about in future chapters 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 want to liquidate their shares, they redeem (sell) those shares back to Vanguard (Vanguard “cashes out” the shares).
Here’s a quick video discussing the differences between negotiable and redeemable securities:
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