Next video:
Loading the player...

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

When a security is loaned, the borrower puts up collateral in the form of cash, a security, or a letter of credit. Title and ownership is transferred to the borrower. In short selling, investors borrow a security to sell with the plan to profit by buying it back at a lower price.

Institutional investors such as hedge funds and ETFs are the biggest lenders of securities. Securities lending has become common because it can provide nice returns and make markets more efficient. But there are risks.

An ETF may have thousands of shares of stock available to loan. A short seller pays the ETF a fee and posts collateral for the right to do so. But if the shorted security rallies, the borrower might default. The collateral also might not cover the ETF’s cost, or the ETF may invest that collateral in something that loses value.

Related Articles
  1. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  2. 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 ...
  3. 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. ...
  4. Investing

    Cash Flow Lending Vs. Asset-Based Lending

    When companies need financing, they rely on two primary forms of lending: cash flow-based and asset-based lending. We look at the pros and cons of each.
  5. Investing

    Shorting ETFs: Profit Or Peril?

    Although more detail and attention may be needed, ETFs can be shorted - and at a great profit.
  6. Trading

    Introduction to Margin Accounts

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

    Using Collateral to Obtain a Loan for Your Small Business

    Learn what assets can be used as collateral for an asset-based loan, and find out best practices when seeking asset-based lending.
  8. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
  9. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  10. Tech

    What Goldman Sachs’s Online Lending Means For Banking

    Recently Goldman Sachs has announced its entry into the online lending space. Most commonly known as an investment bank, Goldman’s newest venture may provide insight into the future of online ...
Hot Definitions
  1. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  2. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  5. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
Trading Center