Property Futures

Real Estate News, Reviews and Investment

Creative Finance: Stock Loans

Article: definition of the term ‘stock loan’ and its uses.

It is possible to temporarily transfer the ownership of stocks, using them as collateral, in return for a loan of cash, securities or bonds. As the stocks act as collateral, they will be forfeit if the loan is not repaid.

Getting a stock based loan

Stock Loan

Stock loans are primarily used by businesses and financial institutions, typically by traders making short sales. They can also be a way for a business to raise funds without ceding control of the company, for example by getting a loan secured against 20% of the company’s shares.

As with any loan, it’s important to fully understand the commitment being made. Issues to consider include:

  • As the stocks are collateral they may be forfeit if the loan is not repaid on time
  • Voting and dividend rights pass to the holder
    • Although they may be adjusted by the loan agreement, in principle this means that someone holding 25% of a company’s shares and a stock loan of 30% would be the majority shareholder
  • Lenders holding stock as collateral still charge interest on the loan
  • The holder need not keep the shares
    • Like cash, shares are considered fungible so the holder only commits to returning an equal number of shares, not the identical ones
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