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.