5 Biggest Myths About Securities Lending
Securities lending is allowing people to access capital they wouldn’t have been able to get. It involves using securities as a collateral for getting a loan. The borrower then makes fixed interest payments over the life of the loan.
Once the borrower repays the loan, the lender transfers their securities back to them. While this explanation captures the essence of these transactions, there are still many myths surrounding the process.
The good news is we are going to clear up these misunderstandings.
First, securities include stocks, bonds, debentures, notes, and options. There’s also mutual funds, treasury bills, and other derivatives. During transactions, some of these are negotiable while others are non-negotiable.
Investors prefer stocks and bonds because they are “liquid.” This means they are easier to trade and deliver a high return on investment (ROI).
Keep reading to learn the myths people hold on to about securities lending.
Common Myths About Securities Lending
The Securities Exchange Act of 1934 opened up a new world of opportunities in the financial sector. It meant borrowers could secure a stock loan against the securities they own. The lenders determine the loan amount by looking at the number of shares, stock prices, and other criteria.
Let’s look at the five biggest myths people have about securities lending:
1. There is No Regulation in the Securities Market
Any top security lender will tell you the number of regulations they have to adhere to. In the U.S., regulation comes through the Securities Exchange Commission (SEC). In the U.K., the Financial Conduct Authority (FCA) handles everything.
Let’s just say, if you break the law, you’ll have several agents knocking on your door.
2. Short Selling Reduces Asset Value
Short selling is about borrowing securities, selling, and buying them back at a profit. People assume it causes fluctuations in asset value thus affecting the company’s standing. However, the market shows there is nothing to worry about since all the stocks are doing well.
3. You Must Have a Credit Report
People get anxious every time they hear about credit reports. It determines the kind of interest rates you’ll pay and whether you should be given a loan. With stock loans, however, you get a loan package dependent on your stock.
4. It Takes Time to Process the Loan
Security lenders underwrite loans in-house. Thus, the process is fast and you can have the loan in about 48 hours. You’ll also get advisers to guide you through the entire process.
The lender will wire the money to your bank account. Moreover, the entire process will be private and confidential.
5. Loans Have High-Interest Rates
Stock loans have low interest and competitive rates. They use various strategies to calculate the value of your stock. Plus, they offer very flexible terms to allow you to get value for the loan.
Learn More About Securities
As you can see, there’s no reason to let these myths hold you back. Lending securities have its challenges. Yet, the more people learn, the better questions they will ask. This helps keep the industry honest.
Contact us to learn more about securities.