Understanding Security Lending
What is there to understand about Security lending?
Stock loans can refer to a number of different forms of borrowing money, usually against the value of one`s stock. Some popular kinds of stock loans are non-recourse loans, borrowing against an owned stock, and margin agreements.
A non-recourse loan is one that is made, often with a third-party lender, in which stocks are given as collateral for a sum of money roughly equal to a certain Loan To Value (LTV) of the securities. Many pitfalls exist for both the borrower and lender in these kinds of stock loans. Both parties are known for defaulting on repayment or return of stocks at the end of the loan term, and as the name implies, there is no recourse in these situations.
Borrowing money against stocks, means that as collateral, only the stock is given, rather than one`s ability to pay back a loan. This is similar to borrowing money against a home or property. The biggest danger here occurs in the form of one`s stocks dropping in value while the repayment amount for the loan remains the same.
Similar to borrowing against stocks in a margin agreement. In this situation, a lender provides funds up to 50 percent of a borrower`s marginable assets when purchasing new stocks. The loan comes with an interest rate and is paid back as the stocks appreciate in value. This allows the borrower to purchase more stocks than they would otherwise be able to using their funds alone. Whether the stock does well or not, the effects of this kind of loan are compounded. The gains can be very big, but so can the losses.
A borrower should simply put up the stock as collateral and obtain the best possible loan terms and hope that the stock will not drop drastically in value during the loan term. A stock loan is a simple and quick process.