What is a 'Stock Loan Fee'
A stock loan fee is a fee charged by a brokerage firm, to a client, for borrowing shares. A stock loan fee is charged pursuant to a Securities Lending Agreement that must be completed before the stock is borrowed by a client (such as a hedge fund or retail investor). The stock loan fee amount depends on the difficulty of borrowing a stock – the more difficult it is to borrow, the higher the fee. The borrower must also put up collateral to borrow the stock. Acceptable collateral includes cash, Treasuries or a letter of credit from a U.S. bank. If the collateral is cash, the interest paid by the stock lender may offset part of the stock loan fee. The stock loan fee can also be called the borrow fee.
BREAKING DOWN 'Stock Loan Fee'
Stock lending is made possible by the fact that most shares held by brokerage firms on behalf of their clients are in “Street name” (i.e. they are held in the name of the brokerage firm or other nominee), in order to facilitate share transfer.
Stock is generally borrowed for the purpose of making a short sale. The degree of short interest therefore provides an indication of the level of the stock loan fee, since stocks with a high degree of short interest are more difficult to borrow than a stock with low short interest.
For example, assume a hedge fund borrows 1 million shares of a U.S. stock trading at $25, for a total borrowed amount of $25 million. Also assume that the stock loan fee is 3% annually. The stock loan fee on a per-day basis (360-day year is assumed) is therefore:
($25 million x 3%) / 360 = $2,083.33
A stock loan fee is an often-overlooked cost associated with shorting a stock. While short-selling can be lucrative if the trader’s view and timing are right, the costs involved with it are substantial. Apart from the stock loan fee, the trader has to pay interest on the margin or cash borrowed for use as collateral against the borrowed stock, and is also obligated to make dividend payments made by the shorted stock.