when loan stock is being used as collateral the lender will find the highest value in shares of a business that are publicly traded and unrestricted these shares are easier to sell if the borrower is unable to repay the loan 
lenders may maintain physical control of the shares 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 this type of financing is also known as portfolio loan stock financing risks to lenderssince the price of a share can fluctuate with market demand the value of the stock used to secure a loan is not guaranteed over the long term in situations where a stock loses value the collateral associated with a loan may become insufficient to cover the outstanding amount if the borrower defaults at that time the lender may experience losses in the amount that is not covered by the current value of the shares being held because stock prices can even drop to zero or the company might go bankrupt loans collateralized in this way can theoretically result in a completely uncovered loan issuing business concerns over loan stockthe issuing business of a stock used to secure a loan may have concerns regarding the outcome of the agreement if the borrower defaults on the loan the financial institution that issued the loan becomes the owner of the collateralized shares by becoming a shareholder the financial institution may obtain voting rights regarding company affairs and become a partial owner of the business whose shares it possesses loan stock businessesthere are full fledged businesses that function solely by providing options for loan stock transactions allowing a portfolio holder to obtain financing based on the value of their securities as well as other factors such as the implied volatility of their holdings and creditworthiness a loan to value ltv ratio is established based on the portfolio similar to how a home s value is assessed when securing a home mortgage and the funds are backed by the security holdings in the borrower s portfolio primary dealer credit facilityin sept 2008 as an emergency measure the federal reserve expanded the range of eligible collateral on loans through its primary dealer credit facility pdcf to include some equities this was one among many unprecedented moves by the central bank in the face of the 2008 financial crisis and the pdfc was later wound down in 2010 as the economy stabilized 1in march 2020 the fed reopened the pdcf to address the stock market crash and liquidity problems associated with the spread of the covid 19 virus and resulting containment measures instituted by public health officials the reopened pdcf includes a broad range of equities as eligible collateral 2this makes the fed a holder of loan stock collateral against the overnight loans it makes through the pdcf this potentially exposes the fed to substantial stock market risk during a very volatile period and could raise concerns that the fed as a government institution might end up in the position of becoming a direct shareholder in some publicly traded companies 