How to Hedge Your Risk to the Stock Market with Securities-Based (Stock) Loans
What goes up, must come down.
Such declare the laws of physics for our planet Earth because of the force of gravity, but are there any economic laws that make the same assertion: What goes up, must come down?
Although — on average — the value of stocks and stock markets will rise over time, all stock markets fluctuate up as investors buy stock shares, and then down again with a process called pullback or correction as investors sell in order to take some profit as liquidity.
For example, Tesla shares fell 8.6% on Monday eroding $15.2 billion from Elon Musk’s net wealth in a single day, and plunging 20% from its all-time high on 25 January 2021. On the following day, Tuesday 23 February 2021, shares of Tesla finished another 2.17% lower. With Tuesday’s losses, Tesla turned negative for 2021.
Global economist and market strategist, Peter Schiff, commented in a Tweet, “Two weeks after @elonmusk announced that he spent $1.5 billion of shareholder money buying Bitcoin, #Tesla stock entered a bear market, plunging 20% from its all-time high set on Jan. 25th, and 16% since disclosing the #Bitcoin buy. Not an example other CEOs will likely follow!”
Jim Reid, a senior strategist at Deutsche Bank said, “Tesla and bitcoin are increasingly tied together and the latter had a crazy day, trading down -16.53% at one point before closing -4.21% in its worst daily performance this month. It’s not clear if the moves were prompted by a delayed reaction to an Elon Musk tweet on Saturday in which he said that the bitcoin did ‘seem high’.”
Daniel Ives, an analyst at Wedbush, concurs, “Musk is now tied to the bitcoin story in the eyes of the Street and although Tesla made a billion paper profit in its first month owning the digital gold, it comes with added risk, as seen this week,” Ives told CNBC via email on Tuesday.
This recent sell-off (i.e. profit-taking) in cryptocurrencies was led by Bitcoin (BTC) which plunged close to 17%. You never know how or when a certain stock or security may turn south very quickly — for whatever reason: rumor or fact.
As demonstrated in recent days with Tesla stock prices, even though some global stocks and stock markets are at historic highs — it is nonetheless inevitable that in the future (perhaps sooner rather than later), there will be those investors who will sell their positions in order to take some profit so that the markets will pull back and correct themselves to new levels of current-for-the-new-moment (i.e. dynamic) economic supply and demand.
Those investors left holding long positions in stocks (for whatever reason including expectation of good long-term valuation) during pullbacks and corrections must either hold and absorb the temporary decline in value of those stocks, as is the case currently with Tesla (TSLA), while the market recovers to find new direction and momentum — or those investors may be forced to close the position to sell at a loss.
Your stock may be great, but doesn’t exist in a vacuum, and most stocks will move with the market on average. So if the stock price goes down, how exactly can one hedge, i.e. de-risk, this systemic market risk of owning stocks?
What is a Stock Loan?
A Stock Loan (also known as a Loan-Stock Instrument (LSI) or Loan Stock, a [Stocks/Equity] Portfolio Loan, a Securities-Based Loan (SBL), a Securities-Based Line of Credit (L/C), or a Leveraged Equity Loan (LEL)) is simply a Loan based upon the portfolio of a single stock/equity or the portfolio of multiple stocks/equities that you own (with Title-of-Ownership) which is pledged as collateral for the Loan. Loan Stock refers to shares of publicly-traded common stock or preferred stock that are freely traded and unrestricted which are used as collateral to secure a Loan from another party, i.e. the Lender. This type of financing is also known as Portfolio Loan Stock Financing as well as Securities-Based Lending (SBL).
This should not be confused with Securities Lending where the stocks/equities/securities are Loaned for the purposes of short-selling. Neither should Stock Loans be confused with Margin Loans.
The term Securities-Based Lending (SBL), i.e. Stock Loans, refers to the practice of making Loans using securities as collateral. Securities-Based Lending (SBL) provides quick and ready access to capital liquidity that can be used for almost any purpose such as buying real estate, purchasing property like jewelry or a sports car, investing in a business, or financing international trade.
Generally offered through large financial institutions, private banks, and private lenders, Securities-Based Lending (SBL) is mostly available to people who have a significant degree of wealth and capital. People often tend to seek out Securities-Based Loans (SBL) if they want to make a large business acquisition or if they want to execute large transactions like real estate purchases. Such Loans may also be used to cover tax payments, as investment/hedging strategies to serve as de facto Put Options, to purchase luxury items, real estate, vacations, etc.
How Does the Stock Loan Process Work?
Here’s how the process works: The Lender determines the value of the Loan based on the Client/Borrower’s investment portfolio. In some cases, the Lender may determine eligibility based on the underlying asset, i.e. the Actuals, e.g. the Lender may consider the value/price of the actual Physical Commodity of Gold Bullion or the price of Bitcoin when considering a Loan to an owner of Gold-Related Securities such as Gold-Mining Stocks and/or Gold-Related ETFs, or to an owner of Bitcoin-Related Securities.
The Lender also may consider and end up approving a Loan based on a portfolio consisting of U.S. Treasury Notes or Corporate Bonds rather than Stocks. Once approved, the Borrower’s securities — the collateral — are deposited into a Custodian Account. The Lender becomes a lienholder on that account. If the Borrower defaults, the Lender can seize the securities and sell them to recoup their losses.
The Lender may maintain physical control of the shares, often through a Custodian Brokerage Account in the name of the Borrower, until the Borrower pays off the Loan. At that time, the shares would be returned to the Borrower, as they are no longer needed as collateral.
With a Securities-Based Loan (SBL), i.e. a Loan-Stock Instrument (LSI) or a Stock Loan, the Borrower does not lend the stocks to anyone. Instead, the Borrower pledges the securities to a Custodian Brokerage Account opened in the name of the Borrower (who retains Title-of-Ownership throughout course of the Loan Period) as collateral for a Non-Recourse, Non-Transfer-of-Title Loan from the Lender.
In most cases, the Borrower can get cash liquidity within just a few days. Such credit is popular because it tends to be easier to obtain and requires far less documentation (and liability) than a traditional Loan.
In order to apply for a Stock Loan and start the Loan Application Process, the Borrower needs to provide the Stock Brokerage’s Account Statement that proves ownership of the proposed Stocks/Securities to be pledged as collateral for the Non-Recourse, Non-Transfer-of-Title Stock Loan.
Enter the Stock Loan: Tesla (TSLA) and Bitcoin (BTC) as a Model Case
Let’s say that you have within your investment portfolio some Tesla stocks. On Monday 22 February 2021, you would have lost 8.6% of monetary value in one day, and then by the close of the trading session on Tuesday 23 February 2021, you would have lost an additional 2.17%. If you had panicked and sold during those two trading sessions, you could have lost even more.
Tesla finished 2020 as one of the top-performing stocks of the year. That momentum carried into 2021, with the stock hitting an all-time high on Jan. 25. However, since that high, the stock has tumbled 28%.
28% is a lot of value lost.
A question arises: Would it be possible to withdraw liquidity and take profit from those stocks while still retaining Title-of-Ownership with all its benefits and privileges (such as receiving dividends and potential capital gains) if the stock performs well?
To put it another way: Is it possible to extract liquidity from your stock shares without having to sell those shares?
Yes. Non-Recourse Stock Loans can be used as synthetic LEAPS where for a very marginal cost of an interest rate fee of e.g. 1% a quarter — i.e. 4% a year — you have a potential upside depending upon your stock’s performance. Additionally, you’ve got capped risk on the downside if the stock value dips as in the recent case of Tesla (TSLA) — because you took out Liquidity with a Securities-Based Loan, i.e. a Stock Loan, or a Loan-Stock Instrument (LSI).
Moreover, after you have extracted the Liquidity (without relinquishing Title-of-Ownership) you have Use-of-Proceeds with that Liquidity for other activities: other income opportunities, other risk-diversification opportunities, etc. that you can exercise and execute.
For example, perhaps you see recent pullbacks in the price of #Bitcoin in recent days as good buying opportunities. Therefore, if you had Tesla (TSLA) stock, you could extract Liquidity via a Stock Loan, and use the proceeds to buy Bitcoin — if you believed this to be a good investment.
If the Tesla (TSLA) stock continues to perform well, then simply pay back the Loan on schedule, after which the Stock gets repatriated to the Borrower. However, if the Tesla (TSLA) stock performs poorly for an extended period, then in the meantime you have the Liquidity (without having to sell that stock), and can be thankful that you made the right decision while you either wait for the stock to recover and rise again, or you can consider selling later if circumstances change.
You can make that decision later and cross that bridge when you get to it since you have the Liquidity now — and you didn’t have to sell your stocks in order to get that Liquidity.
Does this sound good to you?
Do you need Liquidity?
If you own Stock/Equity/Securities, then chances are we can help you.
ZZStockLoans.com — We Solve Problems. We Provide Solutions: We Provide Liquidity, Finance, and Money Solutions
Unlike Banks, we as Private Lenders offer you instant Liquidity with absolutely no Loan Covenants, no Personal Guarantees (PG), no Balloon Payments, no Fire Sales, no Call Provisions, and no calling in the notes whatsoever. In fact, since our Loans are Non-Recourse Loan Products, you can even walk away from the Loan (e.g. as an investment exit-strategy) the day after receiving the Loan Proceeds and never make a payment — with no financial penalties whatsoever.
All of our Loans are Non-Recourse Loan Products which means that the Borrower is not personally liable, and has no business liability beyond the stocks pledged as collateral — therefore the Borrower is safer with a Non-Recourse Loan, and has more options and security than a Full-Recourse Bank Loan or a Margin Loan. Our Non-Recourse Loan Vehicles require no credit checks and no financial statements whatsoever other than the Client/Borrower’s Brokerage Account Statement to prove ownership of the securities.
All of our Loans are LOW FIXED-INTEREST %, and not tied to variable interest rates such as the London InterBank Offered Rate (LIBOR) — which is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans — or Prime Rate which is the interest rate that commercial banks charge their most creditworthy corporate customers. This Prime Rate should not be confused with the Federal Funds Rate which refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis.
So where are you going to find and obtain the Liquidity that you need quickly in order to solve whatever your problems may be — in trade, business, investment, or perhaps for personal needs — that require Liquidity Solutions?
If you have a liquid, publicly-traded Stock (or other tradable Security) on any major Stock Exchange worldwide, chances are we can help you. We specialize in providing quick-funding, Securities-Based financing solutions specific to our Clients’ needs. We offer the widest variety of Stock Loans and Securities-Based financing solutions in the industry, and we are flexible where others (most especially Banks) are not so.
More information and details are available at the following URL:
ZZStockLoans.com
STOCK LOANS FAQs: ZZStockLoans.com/index.php#faqs
References:
2.) Investopedia.com
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