Finding ways to earn extra money without a lot of added work is a dream for many people. Unfortunately, finding reputable ways to do it can be difficult. This is where stock lending enters the conversation.
Now, you might be asking yourself, “What is stock lending”? With stock lending, you can make passive income by allowing others to “borrow” your investments for a period of time. Most brokerages already do this without you even knowing or receiving any commission.
The best part of stock lending? You won’t need to sell your investments, so it won’t impact your long-term investment strategy, and you’ll still retain complete ownership. This allows you to take back your shares whenever you want.
With that extra cash, you could spend it however you’d like. Maybe you want to splurge on something for yourself or reinvest it back into your portfolio and make even more money.
In this article, we’ll break down what stock lending is, why someone may want to borrow your stocks, and how you can start stock lending today.
What is Stock Lending?
Stock lending, also sometimes referred to as “securities lending,” is similar to borrowing a book from the library. You lend your stocks to another investor—typically through a bank or brokerage firm—for a predetermined period of time. In return, the borrower pays you a fee or interest rate on top of the stock’s value. Once the agreed-upon time period is up, the borrower must return your stocks to you.
The borrower will usually have to back up to 102% of the value of the amount they borrowed. This can be through cash collateral or treasury bills, which helps protect you in case the stocks aren’t given back at the end of the loan period. For example, if you lend out a stock that’s worth $2,000, the required collateral would be at least $2,040.
Additionally, you’ll still own the stock, which means you don’t have to pay any gains on it until it’s sold. You can still cancel the loan at any time if you’d like to cash out your investment. However, it is important to note that you must actually own your stock to be able to lend it out.
Pro Tip: Use Ziggma’s stock portfolio tracker to quickly sort through your investment holdings and find companies that would be good for stock lending.
Why Would Someone Want to Borrow a Stock?
You may be wondering why someone would even want to borrow your stock. What’s in it for them if they don’t get to keep it? Here are a few reasons why someone would want to borrow a stock:
- Short Selling: If an investor predicts that the price of your stock will go down, they’ll borrow it and sell it at the current price. Then, when the stock price does decrease, they’ll buy it back at a lower price and return your stock to you, keeping the difference as profit.
- Remain Market Neutral: Sometimes, bigger firms need to hold diverse stocks to reduce their market exposure and look neutral. Borrowing stocks for a period of time can help them do this.
- Collateral For Loans: Sometimes, when corporations want to apply for a loan, they have to show they have certain securities. To meet those requirements, they may need to borrow stocks.
- Influence: If they have a stake in a certain company, they may want to borrow stock to have voting rights.
How Do You Make Money From Stock Lending?
When you take part in securities lending, you’ll earn a percentage of the lending rates, which can be anywhere from 0.1% to 5%. The fee is usually determined based on the demand for that particular stock and will be laid out in your securities lending agreement. The longer you lend your stocks, the higher the interest rate will typically be.
The amount of money you’ll actually make will depend on the type of stocks you have and whether you decide to rent out your portfolio or just a few stocks at a time. For example, stocks that are not easy to obtain and have high market demand will make more money than stocks that are easy to obtain.
It’s hard to accurately guess the amount of extra income you’ll earn, but it’s still an easy way to make money without doing anything on your end.
What Are The Risks of Stock Lending?
There are many benefits to securities lending, such as the ability to make passive income, easily cancel a loan, and continue earning dividends. Plus, you won’t feel obligated to manage it on a day-to-day basis. However, with anything, there are some risks you’ll want to be aware of.
You’ll Lose Your SIPC Insurance
When you lend out your stocks, a primary risk is losing SIPC insurance coverage. The SIPC is a federal program that protects investors if their brokerage fails. It covers up to $500,000, including $250,000 for cash claims.
However, when you become a stock lender, the borrowed securities are no longer covered by SIPC insurance. The stocks are technically out on loan and not in your brokerage account. As SIPC only protects assets in your account, borrowed shares are excluded.
You’ll Lose Your Voting Rights
When you own enough stock in a company, you’re sometimes given voting rights or have the ability to make decisions regarding the company’s future. However, you won’t have those rights when you lend out your shares. If having this ability is important to you, this is something to seriously consider.
There is a Risk of Borrower Default
Even though cash collateral is collected, the borrower may still default on the stock. This means they’d fail to return the stock to you once the loan ends. While you will still get the 102% they put down for collateral, you may lose money if the stock has performed well.
How Do You Start Stock Lending?
To start with stock lending, you must first choose between brokerage firms. When making your decision, consider fees, interest rates, transparency of the company, experience, and reputation. Make sure to check what fees the brokerage will be taking and what they will be paying you.
Some popular stock lending providers include Fidelity Investments, Robinhood, and Charles Schwab. However, it’s important to note that some of these programs require you to have a minimum of $50,000-$100,000 in investments to be able to apply to their stock lending programs. That means it’s important to check these requirements before making a decision. Once you’ve chosen a broker, you must set up your account and select the stocks you want to lend out.
The Bottom Line
Choosing to lend your stocks is a great way to earn extra passive income without a lot of work. However, it’s important to carefully consider the risks and choose a reputable provider before diving into stock lending. By taking the time to research and understand stock lending, you can make a well-informed decision on whether it’s the right option for you and your investment portfolio.