Securities Lending Explained

A popular but ill-conceived assumption is that all financially secure investors have large amounts of disposable income at the ready. This is largely untrue because the very nature of the “secure” aspect of their investments, means that much of their spendable or liquid income has been tied up in investments.

For investors who suddenly find themselves in need of liquid funds, a stock loan can be a viable option as opposed to selling off shares and losing money over the long term. If the investor is in possession of a diversified, stable portfolio then taking out a stock loan is the far less risky endeavor. Dipping into investments can cause an investor to miss out on potential appreciation and increased return on investments. Instead, an investor secures a loan to cover any urgent financial needs and pays over a term with the profits from the retained stocks or from other sources.

Some borrowers ask: What if my stock does not appreciate over the course of the loan enough to pay the loan in full? In this case, if an investor’s stock profits do not cover the loan repayment by the end of the loan term, he or she can still sell a portion of stocks to satisfy the loan terms.

As with all financial decisions, there is inherent risk. The same is true when choosing securities lending as a course of action. It is a strategic move and one that involves moderate risk. However, the bonus of providing one with short term liquid assets without a serious disruption to long term financial gain, adds to the attractiveness of this type of loan.