I’m on WealthSimple, and they’ve offered stock lending as a feature. According to the app, this leaves me with complete control of the stock, including voting rights, selling options and everything. Obviously though, people wouldn’t just pay to borrow a stock from the goodness of their hearts, so how does it actually work? I’ve seen conflicting information regarding dividend payments… Is that how the borrower earns their money? If so, does that mean they take all the dividend, or just a share based on how long they borrowed?
Thanks in advance!
In: Economics
Stock lending facilitates physical short selling, where an short seller borrows stock to sell on market and then buy back later (ideally at a lower price, as they are trying to profit from a fall in share price – selling high then buying low).
A stock borrower will pay you (like any loan) in order to borrow your stock, to the sell on the market. The borrower is then required to make up any dividend payments to you as you are still entitled to all benefits of stock ownership. You retain voting rights and still own the stock as normal and nothing will change from an ownership perspective (until you go to sell it and it will need to be recalled for settlement, but that is more of a broker issue than an owner issue for the most part). If the borrower then profits from a price fall, they’ll buy the stock back on market and return it to you.
Why lend stock? Addition portfolio return via income received. For example if you are a big index fund, you are going to hold a large % of Apple shares and this won’t change much over time. You can therefore lend a portion of your shares out to generate additional return over time. There are risks involved which are mostly operational (and tend to be bigger risks in large market dislocation events like the GFC) but for the most part it is a fairly standard process.
Some stocks have higher borrow rates – for example smaller more volatile stocks might have a borrow rate or 5% (annualised) vs a large stock which could be 0.3%. Some stocks will have no available borrow, so it can’t be done with every stock. Sometimes a broker will have to go and locate an investor willing to lend, so it’s not always as simple as being able to find shares to borrow immediately.
Stock borrowing and lending is very popular in institutional investing; borrowing mostly by hedge funds, and lending from many participants including mutual funds, some ETFs etc. Investment banks and brokers facilitate this via their Prime Brokerage and SBL (stock borrow and lend) teams.
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