Stock Loan Fee

AAA

DEFINITION of 'Stock Loan Fee'

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.

 

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Short Covering

    Buying back borrowed securities in order to close an open short ...
  2. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  3. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  4. Real Estate Short Sale

    Any sale of real estate that generates proceeds that are less ...
  5. Short Interest Ratio

    A sentiment indicator that is derived by dividing the short interest ...
  6. Short Interest

    The quantity of stock shares that investors have sold short but ...
RELATED FAQS
  1. How can I profit from a decline in the drugs sector?

    Profit from a decline in the drugs sector by short selling or by purchasing futures contracts or put options. Investors use ... Read Full Answer >>
  2. How can I profit from a fall in the automotive sector?

    You can profit from a fall in the automotive sector by short selling automotive stocks and exchange-traded funds (ETFs) or ... Read Full Answer >>
  3. If I believe Internet sector companies are overvalued, how can I profit from a fall ...

    If you believe Internet sector companies are overvalued, you can profit from a fall in their share prices by engaging in ... Read Full Answer >>
  4. How can I profit from a fall in stock prices of companies in the financial services ...

    The financial services sector, made up of investment brokerage houses, credit services companies and asset management firms, ... Read Full Answer >>
  5. Is going long considered to be less risky than going short?

    Two positions an investor can be in are long or short. A long position is created when an investor buys a security, such ... Read Full Answer >>
  6. How can I profit from a fall in the metals and mining sector?

    Investors profit from a fall in the metals and mining sector by going short on metals or by going long on broader market ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  2. Investing Basics

    Difference Between Short Selling And Put Options

    Short selling and put options are essentially bearish strategies used to speculate on a potential decline in a security or index, or to hedge downside risk in a portfolio or specific stock.
  3. Professionals

    Helping Clients Navigate Short Sales And Foreclosures

    Both buyers and sellers can benefit from a real estate professional experienced in dealing with short sales and foreclosures.
  4. Fundamental Analysis

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  5. Active Trading Fundamentals

    Short Interest: What It Tells Us

    This figure can be a real eye-opener about the market sentiment surrounding a given stock.
  6. Options & Futures

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.
  7. Active Trading Fundamentals

    Short Sales And Foreclosures: When It's Time To Move On

    Sometimes it's better to cut your losses, but foreclosures and short selling can have devastating impacts on your credit score.
  8. Options & Futures

    Questioning The Virtue Of A Short Sale

    This controversial strategy is blamed for making and breaking markets. Read on to learn more.
  9. Active Trading Fundamentals

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  10. Active Trading Fundamentals

    Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center