Warning: New Investor Alert Regarding Securities-Backed Lines of Credit.
According to FINRA (the Financial Industry Regulatory Authority), a growing number of investment firms are marketing securities-backed lines of credit to investors. These lines of credit are similar in concept to a home equity line of credit, except that instead of pledging your home as collateral for the loan, you pledge some of your investment portfolio.
While there may be tax advantages to this type of a loan, i.e. you can obtain cash without actually having to sell your stocks and realize capital gain tax liability, there may be some unexpected consequences as well.
For instance, the value of your investment portfolio is likely to be far less stable than the value of your home. If your investment portfolio drops in value significantly, you may be required to come up with additional money to pledge as collateral on the loan. If you are not able to come up with the additional money, your lender will likely have a right to call the loan and liquidate (and seize) the investment portfolio that you pledged as collateral for the loan.
To learn more about Securities-Backed Lines of Credit, check out FINRA's investor alert: https://www.finra.org/investors/alerts/securities-backed-lines-credit.