Securities Lending

Loading the player...

What is 'Securities Lending'

Securities lending is the act of loaning a stock, derivative or other security to an investor or firm. Securities lending requires the borrower to put up collateral, whether cash, security or a letter of credit. When a security is loaned, the title and the ownership are also transferred to the borrower.

BREAKING DOWN 'Securities Lending'

Securities lending is important to short selling, in which an investor borrows securities to immediately sell them. The borrower hopes to profit by selling the security and buying it back at a lower price. Since ownership has been transferred temporarily to the borrower, the borrower is liable to pay any dividends out to the lender.

Securities lending is generally conducted between brokers and/or dealers and not individual investors. To finalize the transaction, a securities lending agreement must be completed. This sets forth the terms of the loan including duration, lender’s fees and the nature of the collateral.

Benefits of Securities Lending

Securities lending is an integral part to short selling. In these transactions, the lender is compensated in the form of agreed-upon fees and also has the security returned at the end of the transaction. This allows the lender to enhance its returns through the receipt of these fees. The borrower benefits through the possibility of drawing profits by shorting the securities.

Securities lending is also involved in hedging, arbitrage and fails-driven borrowing. In all of these scenarios, the benefit to the securities lender is either to earn a small return on securities currently held in its portfolio or to possibly meet cash-funding needs.

Understanding Short Selling

A short sale involves the sale and buyback of borrowed securities. The goal is to sell the securities at a higher price, and then buy them back at a lower price. These transactions occur when the securities borrower believes the price of the securities is about to fall, allowing him to generate a profit based on the difference in the selling and buying prices. Regardless of the amount of profit, if any, the borrower earns, the agreed-upon fees to the lending brokerage are due once the agreement period has ended.

Rights and Dividends

When a security is transferred as part of the lending agreement, all rights are transferred to the borrower. This includes voting rights, the right to dividends and the rights to any other distributions. Often, the borrower sends payments equal to the dividends and other returns back to the lender.

RELATED TERMS
  1. Manufactured Payment

    A payment made to pass through dividend and interest payments ...
  2. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. ...
  3. Borrowing Power Of Securities

    The value associated with being able to invest in securities ...
  4. Lender

    Someone who makes funds available to another with the expectation ...
  5. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  6. Prime

    A classification of borrowers, rates or holdings in the lending ...
Related Articles
  1. Investing

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  2. Investing

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  3. Markets

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Trading

    Eyeing a Loan? Consider Skipping the Banks

    Peer-to-peer lending platforms, such as Lending Tree, Lending Club and Prosper, offer borrowers newfound leverage. Here's a look.
  5. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  6. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  7. Managing Wealth

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  8. Financial Advisor

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  9. Markets

    Peer-To-Peer Lending Breaks Down Financial Borders

    Banks are no longer the only option for a loan - the P2P lending system operates without them.
  10. Investing

    Short Selling: What Is Short Selling?

    Investopedia Explains: The fundamentals of short selling and the difference between going long or short on an investment.
RELATED FAQS
  1. How does a credit crunch occur?

    A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to ... Read Answer >>
  2. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  3. Does the party loaning shares in a short sale transaction benefit in any way other ...

    To answer this question, we first need to clarify who is doing the lending in a short sale transaction. Many individual investors ... Read Answer >>
  4. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
  5. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  6. When did people first start using collateral to secure loans?

    Read about the history of lending and collateral, including a time when an entire nation was pledged as collateral for all ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center