What is a Cabinet Security?

Cabinet securities are bonds and stocks that are listed on an exchange but do not have much in the way of trading activity. In general, there are far more bond issues that are classified as a cabinet security than stock options. It is not unusual for investors to own small lots of investments that fit into the cabinet security model, although few investors choose to build the portfolio around these types of stocks and bonds.

One of the identifying characteristics of a cabinet security is the number of shares that are usually included for sale in an offering. Unlike most investment options that trade in lots of one hundred shares, a cabinet security usually trades in much smaller lots. It is not unusual for a cabinet security to trade in a small lot, such as ten shares. In some cases, a cabinet security may be traded in a lot as small as five share units.

The exact origin of the designation of these types of holdings as a cabinet security is somewhat obscure. Some financial historians trace the name to the usual type of storage for stock certificates that were used for decades by brokerage firms. Because they went into the cabinet and rarely if ever came out, they became known as cabinet securities. A second theory for the origin of the name is in a similar vein, comparing the storage of the security to that of the fine china in the home. Since the fine china usually remains in the china cabinet except for rare and special occasions, the lack of frequent trading activity on the cabinet security was a natural connotation.

In general, the cabinet security tends to be a bond or stock that is relatively stable, so there is no real motivation for the investor to want to buy or sell the security at any given time. Instead, the investor may choose to incrementally purchase additional shares as they become available, since a cabinet security presents the chance to make a small profit over time.