A pledge of stock is a form of collateral given to a lender to secure a loan. More specifically, shares of stock held in a public company are turned over to the lender until the loan is paid off. Pledging stock can be very risky, especially for uninformed borrowers, so it's best to understand the factors that may affect the pledge of stock as collateral.
The stock owner is referred to as the pledgor. This person must physically convey the number of shares of stocks required to secure the loan to the pledgee. The pledgee uses the stock to secure the loan for the pledgor, and a legally binding agreement must be drafted to authorize the transaction.
Pledgor Rights and Responsibilities
Usually, the pledgor may still exercise a vote in the company that holds the shares of stock, and he also may receive income from the dividends paid out from the stock, unless those stock dividends are also collateral. The pledgor is required to ensure that the stock is in his or her ownership and is free from all liens, and he may not assign any rights or restrictions to the stock once it's pledged.
Pledgee Rights and Responsibilities
The pledgee can sell or assign the debt and the pledged stock to a third party at the pledgee's discretion. If the pledgee does not sell or transfer the debt, he must hold the stock until the loan is paid in full, and then return the shares of stock to the pledgor.
If the pledgor doesn't pay the debt or breaches the pledge contract, the agreement is defaulted and she faces penalties. The pledgee may foreclose on the pledged stock by selling it at a public or private auction after the default is confirmed and the pledgor is notified. If the shares of stock don't bring in enough money to cover the debt, the pledgor is responsible for paying the remainder. The pledgor may also be required to pay the pledgee's attorney's fees and collection costs.
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