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. Utilization Fee

    An annual fee assessed by a lender against a borrower. The fee ...
  2. Stock Loan Rebate

    Interest paid by a stock lender to a borrower who has put up ...
  3. Origination Fee

    An up-front fee charged by a lender for processing a new loan ...
  4. Borrowing Base

    The amount of money a lender will loan to a company based on ...
  5. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of ...
  6. Drop Dead Fee

    Fee paid by a borrower to a lender when an acquisition deal falls ...
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

    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. ...
  3. 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.
  4. 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.
  5. 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.
  6. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  7. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  8. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  9. Personal Finance

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending -- but you need to understand the entire deal first before jumping in.
  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. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  3. 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 >>
  4. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center