Today, investors have so many financial options to use their assets to save for the future. One of them is ‘stock loans.’ You can understand these as getting money in the present in exchange for stocks. And yes, you need to pay back the loan in a particular duration. In this blog post, we will learn about stock loan services in detail.
Understanding Stock-Secured Loans
Many people know the term ‘stock loan’ by some other names such as ‘stock-secured loan’ and ‘securities-backed lending.’ Basically in a stock loan, the investors can borrow money by using their existing stocks. Yes, you are guessing it right! The stocks will work as assets here. You can understand it like a pawn shop for your investment portfolio.
Who Offers Stock Loan Services?
If you want to borrow a loan on your existing stocks, there are so many stock loan companies or lenders available in the market. They will accept your shares as security (that they will keep to themselves). And you can earn cash in return for the same. But you can get a loan only up to a specific percentage of the value of your stocks.
Worldwide Stock Loans is one such lender. We specialize in providing investors with financial support by offering immediate liquidity while keeping their stocks’ portfolios flawless. If you also want to cover your financial needs without directly selling the stocks, our stock loans service can be a wise option for you.
Who Will Have The Ownership Of Stocks?
Many people worry about the ownership of their stocks while investing then with stock loan companies. So, you do not need to worry about it as you will remain the real owner of your assets even after getting a stock-secured loan. But the lender will keep them to himself/ herself until the time you repay the whole loan to the company.
Types of Loan Stocks
Basically, there are two types:
Unsecured Loan Stocks
These do not provide any collateral to the lenders as backup. In brief, lenders have no specific claims to any of the borrower’s assets.
Convertible Loan Stocks
On the other hand, these provide a layer of security to the lenders where they have the potential to become shareholders of the borrower’s assets.
How Do Stock Loans Work?
The process is quick and straightforward:
- Identify a Lender: Look for trusted lenders for share-backed finance. You can consult banks or brokerage firms as well for the same. Compare interest rates, loan-to-value ratios (LTVs), and any associated fees.
- Choose the Stocks to Pledge: As you finalize a lender, choose the stocks that you want to exchange for stock-based loans.
- Negotiate the Loan Terms: Have a proper discussion with the lender on all the loan terms from the LTV ratio to the duration of paying back the loan. Make sure that you keep proper transparency in this step.
- Collateral Transfer: Upon agreement, you will transfer your collateral to the lender. Keep in mind that you are not losing the ownership of your stocks here, it’s just a temporary control transfer.
- Receive the Loan Funds: Enjoy the immediate cash that you will earn.
Why Everyone Should Borrow Against Stocks?
With so many options available in the financial market, people question why to go for share-backed finance. So, here are some of the benefits that you can earn from securities backed lending:
- Unlock Liquidity: Securities-backed lending provides you the opportunity to convert your stocks to assets without selling them permanently. Later on, you can use this immediate cash for your present requirements.
- Maintain Portfolio Ownership: As you will remain the original owner of your stocks, you can enjoy any potential benefits of any increase in stocks’ value.
- Potentially Lower Interest Rates: As a stock secured loan uses collateral, it offers lower interest rates.
- Meet Margin Requirements: If you wish to use your stocks’ portfolio for margin trading, share backed finance can help you with extra cash.
You can also read our blog to learn more about “why everyone should borrow against stocks” in-depth.
Potential Downsides
With all these advantages of stock loans that perfectly answer why everyone should borrow against stocks, there are some potential downsides as well that you need to take care of:
- Margin Calls: You need to understand the importance of the LTV ratio while going for a loan on stocks. That means in case the value of your stocks decreases anyhow, you will receive a margin call to either deposit some additional cash or provide other stocks to maintain the required ratio.
- Market Volatility: As the stocks market keeps on fluctuating from time to time, hence the overall value of your stocks will depend on that. The margin calls will also depend on the same.
- Loss of Voting Rights: Although you are the original owner of your stocks, you might lose voting rights for the duration of the loan.
- Loan Fees: The overall cost isn’t only about submitting your stocks. You need to take care of additional origination fees, maintenance fees, and interest as well.
Conclusion
Overall, a stock loan is a wise financial service that can help investors earn liquidity at the moment instead of selling the stocks directly. By using your stocks as assets, you can enjoy several benefits like gaining financial flexibility to invest in other areas, un-doing pause on your future investment strategies, maintaining ownership of your stocks to yourselves only, and many more. But it’s also essential to be aware of the other side of stock loans as well. There are some possible associated risks while buying a loan on your stocks that include additional loan fees (that need to be transparent), getting margin calls from the lenders if the LTV ratio goes down, and much more. Hence, learning both sides of the coin are important while going to borrow stock loans.