What is Securities-Based Lending?

About Securities-Based Lending:

• It is the practice of raising a loan by offering your existing investments in stocks/mutual funds/ Exchange-traded funds (ETFs) as collaterals.
• These kinds of loans are generally offered to high-net-worth individuals by large financial institutions and private banks.
• The loan amount depends on the security the borrower is offering.
• The loan can then be used for making purchases like real estate or personal items.
• This loan cannot be used for making further security purchases.
• Due to the inherent volatility in the nature of stocks/mutual funds, the risk of forced liquidation tends to be very high for these loans. 
• Borrowers benefit from easy access to capital, lower interest rates, and greater repayment flexibility and also avoid having to sell their securities.

 

---

Q1) What is equity security?

An equity security is a financial instrument that represents an ownership share in a corporation. The instrument also gives its holder the right to a proportion of the earnings of the issuing organization. The typical equity security is common stock, which also gives its owner the right to a share of the residual value of the issuing entity, in the event of a liquidation.

Source: Adani Group prepays $902 million share-backed loans