Investors often assume that a stock loan is the same as a margin loan, with the primary difference being that margin loans are offered by brokers and stock loans are extended by independent lenders. In reality, the differences between these two types of loans are significant, and in almost every case a stock loan offers investors better terms with fewer risks and limitations.
The advantages of stock loans over margin loans are apparent when the key features of both loans are compared and contrasted with each other:
Even with all of their advantages over margin loans, stock loans are a product that only sophisticated investors should consider when they are seeking sources of liquidity. The stock loan industry is subject to the same laws, rules, and regulations that generally apply to the domestic and international securities markets, but it is a lightly-regulated sector of those markets. An investor that is seeking a stock loan should do thorough due diligence and analysis before completing the transaction, including reviewing all stock loan documents and materials with the investor’s legal, tax, and accounting advisors, and verifying the investor’s understanding of the benefits and risks that a stock loan provides.
Stock loan investors should also stay closely attuned to changes in the market price of the collateral that the pledge as securities for loans. Lenders that originate stock loans will not make the same kind of margin calls that brokers will make for margin loans. Nonetheless, the loan agreement that is part of a stock loan transaction might allow the lender to terminate the loan and to take full legal and equitable ownership of the collateral if the per-share price of the pledged stock falls below certain floor values that are defined in the loan agreement.
Alternately, if the per-share price of the collateral increases during the term of the loan, the investor may have an opportunity to modify a stock loan to increase the loan’s principal balance and to draw more liquidity in relation to the stock’s appreciated value. Stock loan investors also retain the right and opportunity, upon repayment of a stock loan’s principal, to receive the full value of stock or cash dividends that an issuer declares on the collateral shares that an investor pledges for a loan.
The Private Bank offers stock loans that are collateralized by securities that are traded on most international public exchanges. Please contact one of our stock loan agents or call the Private Bank directly to speak with a specialist who will show you how to unlock the liquidity of your publicly-traded stock assets with a negotiated stock loan.
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