What are 'Encumbered Securities'

Securities that are owned by one entity, but subject to a legal claim by another.

When an entity borrows from another, legal claim on the securities owned by the borrower can be taken as security by the lender should the borrower default on its obligation. The securities' owner still has title to the securities, but the claim or lien remains on record. In the event that the securities are sold, the party with the legal claim on them must be given first opportunity to be paid back. In some cases, encumbered securities cannot be sold until any outstanding debts belonging to the owner of the securities are paid to the lender who holds claim against the securities.

BREAKING DOWN 'Encumbered Securities'

Just as a house may be used as collateral for a mortgage, securities may be used as collateral for borrowing. While title does not change hands, it is limited by the extent of the lien on the assets. Contrast with "unencumbered".

RELATED TERMS
  1. Securities Lending

    The act of loaning a stock, derivative, other security to an ...
  2. Security Interest

    A legal claim on collateral that has been pledged, usually to ...
  3. Borrowing Power Of Securities

    The value associated with being able to invest in securities ...
  4. Borrowing Base

    The amount of money a lender will loan to a company based on ...
  5. Manufactured Payment

    A payment made to pass through dividend and interest payments ...
  6. Collateral

    Property or other assets that a borrower offers a lender to secure ...
Related Articles
  1. Investing

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  2. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  3. Personal Finance

    Explaining Non-Recourse Debt

    Non-recourse debt limits a lender as to what it can and cannot pursue for collateral.
  4. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  5. Investing

    How Does a Lien Work?

    A lien gives a creditor the legal right to seize and sell property, then use the proceeds to pay off a borrower’s debt.
  6. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  7. Personal Finance

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
  8. Investing

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  9. Investing

    Homeowners, Beware These Scams!

    If you're in a pinch for money, you're the prime target for con artists and thieves.
  10. Personal Finance

    What Does a Lender Do?

    A lender provides funds to another with the expectation those funds will be repaid with interest.
RELATED FAQS
  1. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
  2. What is the difference between a possessory and a non-possessory lien?

    Gain a basic understanding of a possessory lien and a non-possessory lien, the key differences between the two structures ... Read Answer >>
  3. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
  4. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  5. What are the characteristics of a marketable security?

    Find out what it takes for a financial asset to be considered a marketable security, including its liquidity, intent of use ... Read Answer >>
  6. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center