March is almost over and 2012 has started to heat up. Rising oil prices are the headlines that are weighing heavily on global consumers, dragging down futures with peak oil in sight. On one side you have the bears telling us to get out of the market. The bulls reply – is it is only a slight bump on the way to additional upside? What choices remain for the global investor? There is a previously unavailable option normally used by the wealthiest investors which will allow you to stay in the market while creating liquidity; stock loans.
Stock loans have been around for several years and, as Nuwire previously reported, they can be a useful tool for short or long term borrowing needs. Since the earlier article was written, a shake-up has taken place in the stock loan industry. A number of under-capitalized and poorly managed stock loan providers were forced out of the marketplace, leaving behind a smaller number of more professional and responsibly structured Lenders. The goal of this article is to help educate you on the proper way to obtain a secure stock loan.
First, let’s cover the fundamentals of the stock loan. It is a financial instrument that allows the borrower to maintain a position in the market, while creating liquidity to meet an immediate monetary goal. You, as the client, will pledge a stock or portfolio of stocks to the lender. The lender, in turn, offers you a set of loan terms. The most common terms are the length, or duration, of the loan term, the LTV (Loan To Value), and the interest rate. Firms may include a origination fee as well, usually ranging in size from 1% – 5%. If you agree to these terms, contracts and loan documents are issued, the securities are transferred to the Lender’s custodian and the funds are wired to the borrower’s account.
How can you, as a smart investor, choose the right lender and the right product? One word; homework. You should look at the management and board of the lender. If there is no information on the firm and its management, it’s a good idea to keep on looking. Look for established names in finance, or for companies with well-known political connections. Don’t be afraid to ask questions. One of the most common mistakes made by first time borrowers is the middle-man trap. Always ask your lender if they are, in fact, a direct lender. If they charge you any fees or points in the transaction, chances are you are dealing with a middleman.
Ask for references. If you are dealing with your own advisor, ask to see if he has worked with the lender before. Ask for references from his other clients. Reach out to the company’s board of directors. Most prominent board members will never involve themselves with a company that performs risky transactions.
One of the simplest ways to verify a company is to search for them on google. This easy method will usually return just about any mention of the company, allowing you to scan through the results to help determine a company’s reputation.
Stock loans are a smart and efficient way to access liquidity and to manage your portfolio on a long term basis. If the start of 2012 is any indication as to the rest of the year, stock loans might just be the smartest way to manage your risk.