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What is Loan Stock?

By Katharine Swan
Updated May 16, 2024
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A loan stock is a type of fixed income security, a loan that is made to a company. Although the term might suggest otherwise, the holder of a fixed income security is merely the company’s creditor and does not have any say in their business. There are two types of fixed income security: loan stock and debenture.

Unsurprisingly, loan stock is stock granted in exchange for a loan. There are two basic kinds. The first kind, unsecured loan stock, basically means that the company receiving the loan offers no collateral to guarantee that the loan will be paid. In other words, if the company defaults on the loan, the creditor has no right to the company’s property as repayment. This type is therefore very much like the unsecured loans individuals can get.

The second kind is called convertible loan stock. It offers the company a low, fixed interest rate. The creditor benefits by having the ability to convert the loan stock into actual shares in the company. The loan contract sets forth specific terms and a time frame for its conversion.

Debenture, the second type of fixed income security, is different in that it is a secured loan. However, the way that a debenture is secured is not quite the same as when an individual or an entity offers a specific piece of property as collateral. In cases of collateral, the specific property is turned over to the creditor to sell for payment if the individual or entity defaults on the loan. In the case of a debenture, the loan is secured only loosely so, as there is no specific property assigned as collateral: if the company defaults on the loan, the creditor may sell any part of the company’s property that has not already been promised on other accounts as collateral, and can claim the proceeds as payment. Debentures benefit the company receiving the loan by leaving their property free to be used as collateral for other financing.

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Discussion Comments
By tandrews — On Nov 02, 2015

I have not been so much interested in all these forum post here on loan because of red flags on comments but a week ago i read a convincing testimonial here on the forum about a credible firm offering affordable loan in Pennsylvania. i decided to give them an opportunity, i was impressed because they gave me an A+ rating in financing as i got financing from the firm, so i decided to share this on here, there is a credible firm you should work (HIGHLY RECOMMENDED) with and that’s Mr. James Carl. To get in touch just call or SMS him directly through phone: 267-884-0582

Or email: jamescarl(at)zoho.com

By anon179478 — On May 23, 2011

Is the convertible loan stocks interest income taxable?

By anon44455 — On Sep 08, 2009

What is the difference between loan stock and capital surplus?

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