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7 truths about stock lending: a guide for investors

Peter Siks

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

What is stock lending?

In its shortest form possible, stock 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 development.

The way it works is that you lend out your stock 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 stock in question.

Who is it interesting for?

Stock 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 stocks?

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

Who owns the stocks while they are lent out?

You are still the economic owner of stocks that are lent out. This means that you still earn or lose money if the stock rises or falls in price. You are also entitled to a dividend-replacement payment. But while your stocks 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 stocks 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 stocks?

What you will often hear is that it is only hedge funds that borrow stocks and that do that to short the stock, i.e., to bet against the stock. 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, stock 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 stock 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 stock lending in your account via the platform. Read more about how stock lending works in Saxo and compensation, you may get from some stocks.

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

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