Understanding Loan Stock
When Mutual Funds and Shares are being used as collateral, the lender will find the highest value in shares of a business that are publicly traded and unrestricted; providing a very high liquidity and these shares are easier to sell if the borrower is unable to repay the loan. Lenders keep a lien/ control of the shares until the borrower pays off the loan. Once the loan is paid off, the shares would be returned to the borrower, as they are no longer needed as collateral.
Risks to Lenders
Since the price of a share fluctuate with market demand, the value of the stock used to secure a loan is not guaranteed over the long term. In situations where a stock loses value, the collateral associated with a loan may become insufficient to cover the outstanding amount. If the borrower defaults at that time, the lender may experience losses in the amount that is not covered by the current value of the shares being held. Because stock prices can even drop to zero, or the company might go bankrupt, loans collateralized in this way can theoretically result in a completely uncovered loan.
The benefits of marketable securities backed finance include:
- Liquidity to pursue your existing investment strategy and investment opportunities
- Additional capital without selling securities
- No interruption to your asset allocation and long-term investment strategy
- Keep on earning on the portfolio yield enhancement