Encumbered Securities

You own stock in a local manufacturer of high-end toenail clippers. You need money to pay off some gambling debts, but you'd rather not have to liquidate your shares (you see a lot of long-term potential in expensive pedicure equipment).

So you use your stock as collateral for a loan. You keep ownership of the stock and you get the chunk of money you need. But, if you default on the loan, the bank gets your stock in lieu of payment.

Now those shares have become encumbered securities. You own them. But the bank has a legal claim on them as collateral for the loan. Until you pay back the loan, your stock remains "encumbered."

The status legally curtails your freedom of movement when it comes to those shares. The bank has a say, too. They don't own them, but they have a claim.

So if you try to sell the stock, the bank might have the right to claim all or part of the proceeds as repayment for the loan. Or, depending on the terms of the loan, you might not be able to sell the stock at all without talking to the bank first.