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.

RELATED TERMS
  1. Stock Loan Rebate

    Interest paid by a stock lender to a borrower who has put up ...
  2. Utilization Fee

    An annual fee assessed by a lender against a borrower. The fee ...
  3. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  4. Securities Lending

    The act of loaning a stock, derivative, other security to an ...
  5. Origination Fee

    An up-front fee charged by a lender for processing a new loan ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
Related Articles
  1. Small Business

    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.
  2. Investing

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  3. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  4. 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. ...
  5. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  6. Personal Finance

    Personal Loans: Consider These Alternative Lenders

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

    Simple Interest

    Simple interest is a quick method of calculating the interest charged on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.
  8. Financial Advisor

    The Best Way To Borrow

    There are many avenues from which to drum up funding. Find out the pros and cons of each.
  9. Investing

    A Guide To Investor Fees

    Fees are one of the most important determinants of investment performance and something that every investor should know.
  10. Personal Finance

    Mortgage Fees That Can Trash Your Refinance Deal

    Before deciding that refinancing your mortgage at a lower interest rate is a good deal, factor all the fees into your calculations.
RELATED FAQS
  1. 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 >>
  2. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  3. When is an underwriting fee too high on a commercial loan?

    Learn about underwriting fees and when they're too high. If the underwriting fee exceeds 2% of the total loan size, the fee ... Read Answer >>
  4. If an investor is short a dividend-paying stock on record date are they entitled ...

    Learn what short sellers must do when they are short a dividend-paying stock on record date. Read Answer >>
  5. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center