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7 truths about securities lending: a guide for investors

Peter Siks

Summary:  Securities lending - or stock lending - is a tool that has been used often by institutional investors. The concept offers an alternative revenue stream and has only recently become available for private investors and traders. While the term may evoke different levels of confusion depending on how well versed you are in the financial world, it is something you should consider.


What is securities lending?

In its shortest form possible, securities lending is an opportunity for you to earn additional income on the stocks and ETFs in your portfolio. This income is independent of the development in said stock or ETFs price.
The way it works is that you lend out your securities to a counterpart and for that, they pay you an interest. The size of this interest is determined by the supply and demand of the securities in question.

Who is it interesting for?

Securities lending is interesting for all investors that want the opportunity to earn an extra passive income on their portfolio. It can be particularly interesting for longer-term investors who invest in securities with a relatively high lending fee.

Who are borrowing your securities?

The counterpart borrowing your securities can be more or less all market participants such as pension funds, insurance companies, brokers, banks, and other investors or even investment funds or ETF managers.

Who owns the securities while they are lent out?

You are still the economic owner of securities that are lent out. This means that you still earn or lose money if the securities rise or fall in price. You are also entitled to a dividend-replacement payment. But while your securities are lent out, you are not the legal owner, which primarily means you are not allowed to attend the shareholders' meeting.

Most importantly, you can sell your securities at any time you wish even though they are lent out. Naturally, this also ends the right to compensation for the lending.

Why do these people want to borrow my securities?

What you will often hear is that it is only hedge funds that borrow securities to short the security, i.e., to bet against the security. This does happen, but there is a very real chance that the borrower sees it as part of a more complex, comprehensive strategy. Because in reality, securities lending is widely used for a variety of purposes, such as being able to deliver on time by market makers and liquidity providers and arbitrage trading.

What are the risks?

When you enable securities lending at Saxo, the borrower will always be Saxo. This means that the only risk you face is that Saxo defaults and is unable to return your shares to you. To protect you from this, we will post cash or other securities in a separate depot corresponding to the value of the securities you have lent out. That's called collateral. The collateral ensures that even in the unlikely event that Saxo defaults, you get back the proceeds of the collateral.

How do you get started?

You can activate securities lending in your account via the platform. Read more about how securities lending works in Saxo and compensation, you may get from some securities

You can also dive further into the inner workings of securities lending.

 

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