What is stock lending?

How does stock lending work?

• As an investor, you can earn extra income from loaning out your fully owned stocks or securities to borrower third parties in exchange for other stocks, securities or cash as collateral.
• The borrower will be responsible for paying a fee for the loan as well as any regular interest or equivalent dividend payments that might amass over the loan’s term.
• A loan agreement is typically drawn up and put in place before the transfer of any stock or security loan is finalized.
• Borrowers may want to carry out a “short sell” ultimately, to sell the borrowed stock or security at a higher price and then later buy them back at a lower price to make a profit.

What are the risks of securities lending?

• The value of stocks and securities can go up as well as down, and there’s no guarantee that, as an investor, you’ll make extra income from stock lending.
• A borrower might not return the loaned stocks or securities to the investor or might default on the original loan obligations.
• Securities lending is not protected by the Securities Investor Protection Corporation (SIPC). With no insurance, investors will need to turn to the brokerage firm and any protection it might offer if something goes wrong.
• The borrower is locked into a loan agreement. So even if they make a loss on the borrowed stocks or securities loan, they will still need to be honored and paid to the brokerage firm and the original lender.
• While stocks are on loan, you lose your voting rights as the investor and owner of these stocks.

What stock trading platforms offer stock lending?

We’ve rounded up some of the most popular stock trading platforms that offer stock lending:

SoFi Invest®

SoFi Invest has the Securities Lending Program for its investors, matching stocks with borrowers interested in short-selling the stocks to make a profit. As an investor, you could earn extra income from the interest payments that borrowers agree to make to borrow your stocks.

Tastytrade

Tastytrade has its Fully Paid Securities Lending for its investors wishing to earn additional income of fully owned stocks and ETFs. By opting into the program, investors can expect half of the generated revenue from the stocks being loaned out.

Public.com

Public.com offers its Fully Paid Securities Lending Program through Apex. If you agree, Apex loans out any whole stocks in your portfolio to other investors or institutions that pay an equivalent dividend payment. While SIPC does not cover the loaned stocks, Apex is required to set aside at least 110% of the stock’s cash equivalent to a partner bank should an issue arise.

Interactive Brokers

Interactive Brokers (IBKR) offers stock lending in the form of its Stock Yield Enhancement Program. IBKR borrows your stocks and then finds other traders who wish to borrow these stocks and who are willing to pay interest. 50% of the income raised from lending the stocks will be paid to you. Any whole stocks in your fully owned stock portfolio will be considered for stock lending.

Robinhood

Once you decide to stock lend, Robinhood does the rest. The broker finds a suitable borrower for the stocks you fully own and wish to loan out. If there’s a match, you’ll receive a monthly payment from the borrower. Even while your stocks are loaned out, you can sell your stocks at any point to realize a gain or loss. While there’s no insurance for loaned-out stock, Robinhood will hold the cash equivalent of your loaned-out stock with a third-party bank. If Robinhood were to go under, the third-party bank would pay you the cash value of your loaned-out stock.

How to choose an app to lend your stock

Beyond meeting the eligibility criteria for stock lending, it’s worth considering the features, costs and risks involved for any of the brokerage apps you plan to use, including the following:

• Fees. Will you be subject to any fees to begin stock lending or will the borrower be responsible for these?
• Protection. Will the brokerage firm offer any insurance for your loaned stock should something go wrong?
• Eligibility criteria. Do you meet the brokerage firm’s eligibility criteria for being able to loan out stock?

What type of investors should consider stock lending?

Stock lending is not suited to all investors, especially not those new to the world of investing. This is mainly because you will need to fully own any stocks or securities before being able to loan them out, so some experience in trading will definitely help.

Each brokerage firm will have its own eligibility criteria for being able to stock lend, but most will require some prior trading experience. For Robinhood, investors must have some investing experience and need at least $5,000 in total account value or at least $25,000 reported income. For InteractiveBrokers, any investor wishing to get involved with stock loans will need to be approved for a margin account or have a cash account with a balance of more than $50,000.

What fees and costs are involved with securities lending?

A stock loan fee, also called the borrow fee, is set by a broker for a stock being loaned out. It is the responsibility of the borrower to pay this fee, but the amount can vary between brokers.

Meanwhile, a regular payment (the extra income) will be made to the investor for loaning out stocks to third parties. But it’s also worth noting that the tax you owe on these regular interest or equivalent dividend payments might be higher than on actual dividend payments.

Loan rates can also often change, so the regular payments you receive as an investor could fluctuate.

Compare investment accounts across brokers

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Bottom line

• Stock lending is not for every investor. However, if you have trading experience, fully own stocks and fancy earning some extra income, securities lending is worth looking into.
• While you could earn some extra income from lending the stocks you fully own, risks are involved, such as facing a loss on the reinvestment of the cash collateral from the borrower.
• Always do some thorough research before deciding to get involved with stock lending and know the risks first.

Frequently asked questions about stock trading

• What is meant by stock lending?

  Stock lending is the temporary borrowing of stocks or securities from one party to another. In return, the borrower can transfer other stocks, securities or cash to the lender as collateral. The borrower would also be responsible for paying a stock loan fee or borrower fee. Stock lending tends to happen through a brokerage firm rather than between individual investors. However, it can be seen as a way to potentially make extra money on fully owned but untraded stocks in a stock portfolio.

• Is stock lending a good idea?

  That depends. If you'd like to start stock lending, you'll need to fully own stocks that can be loaned out and meet the eligibility criteria of the broker you intend to use to facilitate the lending. It's also important to understand the risks involved, as detailed above.

• Why would someone lend a stock?

  As an investor, you might want to loan out stocks or securities you own to earn extra income. The loan could see growth through loan fees, or the equivalent dividends or regular interest payments, which the borrower is responsible for. This accrued income could also offset any initial loan fees.

• What is stock lending in Robinhood?

  Only whole stocks and other securities an investor fully owns are eligible for Robinhood stock lending. And as long as the eligibility criteria is met, Robinhood investors can turn on the stock lending function in their account settings to begin loaning out fully owned whole stocks. You won't be able to select which stocks you want to loan out. Instead, Robinhood will consider all whole stocks in your equities portfolio.

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