A stock loan fee is a cost an investor pays to borrow stock from their brokerage or another investor. This fee also enables investors to make money from lending shares of stock that are otherwise just sitting in their portfolios. Borrowers can pay this fee to temporarily have stocks that they can then use for short selling or to gain voting rights.
Stock loan
fees may not be on the radar for much of the general public, but they are a key
component within the overall investing industry. Understanding stock loan fees
can help individual investors potentially increase their investment returns.
Definition and Examples of Stock Loan
Fees
Stock loan
fees are often used to facilitate short selling. With short selling, an
investor bets that the price of a stock will decline. To do so, they first need
to borrow shares and pay a stock loan fee to the lender. The short seller then
sells these borrowed shares to eventually buy the shares back at a lower price.
The short seller then returns the purchased shares to the lender and keeps the
difference as profit.
A stock loan
fee could also be used in cases such as when an investor wants to borrow shares
to have voting rights for a particular stock. For example, a large investor,
such as a hedge fund, that wants to enact change at a company, like replacing
someone on the board of directors, may want to increase the number of votes
they have at a company’s annual meeting. To do this, the hedge fund might
borrow shares so they have enough votes to make this replacement.
How Does a Stock Loan Fee Work?
Both retail
investors and institutional investors, such as pension funds, can loan stocks
and collect stock loan fees. Likewise, both types of investors can borrow
stocks and therefore pay stock loan fees.
For example,
an individual investor who uses an online stock trading site may have the
option to enroll in that brokerage’s stock loan program. The broker then tries
to match the stocks available to loan from that investor with another investor
looking to borrow shares. This process often involves working with other
financial services firms and technology such as digital marketplaces to match
stock borrowers and lenders. If there’s a match, the borrower pays a stock loan
fee that varies based on the scarcity of those shares available for borrowing.
The fee is
typically expressed as an annual rate. So the longer the borrower waits to
return the shares, the more total stock loan fees they’ll pay.
Stock loan
fee rates tend to be relatively low. In the second half of 2020, the average
securities lending fee globally for equities was 0.74%, according to IHS
Markit.1 But stock loan fees for certain stocks that are hard to borrow could
be several hundred basis points. In other words, an investor could earn, for
example, an extra 6% annually just by lending a particular stock not many other
people are lending.
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