Stock Loan Fee

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.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  2. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  3. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  4. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  5. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  6. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
Trading Center