The definition and uses of the term "stock loan"

Stocks can be used as collateral to temporarily transfer ownership in exchange for a loan of cash, securities, or bonds. If the loan is not returned, the stocks will be forfeited as collateral.

Businesses and financial organizations are the most common users of stock loans, which are frequently employed by traders who are undertaking short sales. They can also be a mechanism for a corporation to raise capital without losing control, for as by taking out a loan secured against 20% of the firm's stock.

It's critical, like with any loan, to fully comprehend the commitment being made. Consider the following points:

·         If the loan is not repaid on time, the stocks may be forfeited as collateral.

·         The holder retains voting and dividend rights.

·         Although the loan agreement may alter this, in theory, this means that someone having 25% of a company's shares and a 30% stock loan would be the dominant shareholder.

·         Lenders who hold shares as collateral continue to charge interest.

·         The shares do not have to be kept by the holder.

·         Because shares, like currency, are fungible, the holder simply agrees to repay an equal number of shares, not the same ones.