Hypothecation means pledging an asset as collateral for a loan.
If you use a margin account to buy on margin or sell short, for example, you pledge securities (stocks, bonds, or other financial instruments) as collateral for the debt. If the brokerage firm issues a margin call that you don't meet, it can sell those securities to cover its losses.
Similarly, if you arrange a mortgage on your home, you give the lender the right to sell your home if you fail to meet your obligation to make mortgage payments.
Hypothecation may make it easier for you to secure a loan, but you do run the risk of losing the asset, if for some reason you default on your obligation to repay according the terms of the agreement.
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- Asset-backed bond, Debenture, Junior security, Secured bond, Senior bond, Subordinated debt, Unsecured bond
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