What is a Stock Loan?

A stock loan is a type of transaction that commonly occurs between two different stock brokers. This type of transaction is also known as a securities loan. Here are the basics of a stock loan and why it is important.

Stock Loan

Sometimes, one stock broker is going to loan a certain amount of stock to another stock broker. When this happens, the broker that is borrowing the stock has to put up some type of collateral in order to secure the loan. In many cases, the collateral will be cash. Sometimes, it will be another type of security. The brokers will agree on repayment terms. The broker that is borrowing the stock will have to pay some type of interest rate to the other broker.

Short Selling 

A stock loan is commonly used when traders get involved with short selling a stock. Before you can short sell a stock, you have to first get the stock. Many times, this means that you are going to have to borrow it from another stock broker. Once you borrow the stock from the stock broker, you can then turn around and put in a short sale order.