Stocks and Shares as a Security for the Laon/Advance :

Shares

These may be classified into preference shares (which enjoy preference both with regards the payment of dividend and repayment of capital) and equity shares, i.e., shares which are not preference shares.

Advantages

(i) Value of the security can be ascertained without any difficulty.

(ii) In normal times, stocks and shares enjoy stability of value and are not subject to wide fluctuations.

(iii) Stocks and shares require very little formalities, for taking them as security.

(iv) It is easier compared to real estate to ascertain the title, more so with the advent of depositories.

(v) Creating a charge of this is less expensive than real estate.

(vi) They yield income by way of dividends, which can be appropriated towards the loan account.

(vii) Being a tangible form of securities they are more reliable.

(viii) The release of such securities involves very little expense and formality.

Disadvantages

(i) Being easy to realize, they are fraud prone and as such they must be properly secured.

(ii) In the case of partly paid shares, the following demerits are there:

(a) The banker may have to pay the calls.

(b) Partly paid shares are subject to violent price fluctuations.

(c) They are not easily realizable because of the restricted market for such shares.

Precautions while taking stocks and shares as security

Banker must take the following precautions while advancing against stocks and shares:

(i) In the case of partly paid shares

(a) the banker should never register them in his name.

(b) He must ensure that pending calls are paid.

(c) Sufficient margin should be taken to avoid any future loss or change in the value of the security.

(d) The banker should verify share certificate and ensure that the calls, are paid properly and entered in the space provided for the same.

Other precautions

(i) Update the list of shares which the particular bank is willing to lend against on a regular basis.

(ii) Updating the amount that can be lent against a particular share which is called the card limit at regular intervals

(iii) Yearly review of the portfolio or more frequent review depending upon the volatility in the capital market.