Securities Lending Basics: What Are Stock Loans and When Are They a Good Idea?
Smart entrepreneurs turning a high profit do not just stash their money in a regular bank account and forget about it. The smartest ones use that money to make more money by investing in non-marginable stocks. They then can use those investments to acquire stock loans.
This type of securities lending has greatly increased in popularity over the last few years with major names leading the way. For example, big financial institutions like Bank of America and Morgan Stanley have each allowed clients to borrow more than $40 billion against their stock portfolios.
But what are stock loans exactly and why would you use them? Learn everything you need to know about stock lending below.
What Are Stock Loans?
A stock loan, also known as a securities collateralized loan, refers to a loan offered by a private lending firm or bank and backed/secured by the borrower’s stock shares. The shares must be from a stock officially trading on any of the global stock exchanges.
Banks and private lenders like using stock loans because there is a lot of cash and liquidity in these stocks or assets under management (AUM). The lender determines the value of the stock and how much someone can borrow based on the following 3 things:
- The history of the stock or securities
- The amount the borrower plans to use as collateral
- The loan term length
Every lender has their own regulations and rules regarding stock loans. This includes stock loan fees as well. So it’s important to take the time to go over the specifics of the lender’s contract before borrowing.
Why Would a Business Use Stock Loans?
Businesses can use stock loans in a variety of ways. A few examples include:
- Short-selling stock.
- Access to higher liquidity without losing out on the stock completely through a sale.
- Purchasing a higher-yielding asset like metals or real estate.
- Hedging a business’s position before a market downturn.
- Financing seasonal trading businesses in need of short-term working capital.
As a borrower, you are only liable for the value of the collateral stock. This means you face no repercussions if the value of your securities falls below the loan.
This type of securities lending also comes with lower interest payments since they’re interest-only. So a stock loan allows you to borrow funds without the risk of defaulting on your physical goods or assets like stocks and receivables.
Your securities will continue to generate profits even while put up as collateral. The lending institution often provides you with payments equal to the returns and dividends you would normally receive when in full possession of the stock.
Work with an Expert Securities Lending Specialist
Now you should better understand stock loans and how they play a role in securities lending. Stock loans provide big benefits for both the borrower and the lender.
Still not sure if stock loans are right for you and your business?
Talk to a securities lending specialist from Stock Loan Solutions to ask questions and learn more about how to get access to your capital quickly and easily without having to sell your stock.
Contact Stock Loan Solutions today!