During times of market volatility, some traders engage in short selling, where they borrow shares, sell them, and aim to buy them back at a lower price to profit from the price difference. But who provides these borrowed shares?
The answer is – you do, if you participate in your broker’s stock-lending program. Here’s a breakdown of these programs and which brokers offer them.
Understanding Stock Lending
Stock lending, also known as fully paid securities lending, is a program where you can earn interest by lending your investments to your broker, who then lends them to short sellers.
Most brokers offer this program on an all-or-nothing basis, meaning you can’t select specific stocks to lend – it’s either all or none. However, your broker may not lend out your stocks if there’s low demand for them.
By participating in stock lending, you retain control over the assets you’ve lent out and can sell them at any time. But keep in mind that you may lose certain rights and protections, such as voting rights and SIPC coverage in case of broker insolvency.
I recently explored stock lending after being prompted by Robinhood, and while enticed by the potential returns, I made sure to understand the terms, conditions, and risks involved. Here’s what I discovered.
Key Points About Stock Lending
-
Interest rates can vary and may be minimal. Earnings from stock lending depend on factors like your broker’s revenue share and the demand for the stocks you own. While some stocks offer high lending rates, others may yield lower returns.
-
You may temporarily forfeit your voting rights. When you lend out stocks, the borrower gains voting rights during the loan period.
-
Dividends on loaned shares are taxed as ordinary income. If you receive dividends on shares you’ve lent, they are taxed differently than regular dividends.
-
Loan shares are not covered by SIPC insurance. In the event of broker insolvency, loaned shares are not protected under SIPC coverage.
Note: SIPC coverage does not protect against investment losses, only against broker insolvency. However, with stock lending, even this protection may not apply.
Top Brokers Offering Stock Lending Programs
Several brokers reviewed by BW provide stock lending programs with attractive revenue splits and reasonable account minimums. Here are some of the top options:
1. TastyTrade
Program Highlights: TastyTrade offers a 50-50 revenue split with investors and has no minimum account balance requirement for stock lending.
Additional Information: TastyTrade is known for affordable options trades and a user-friendly platform tailored to advanced traders.
2. Fidelity
Program Highlights: Fidelity offers a generous 60-40 revenue split with investors and has a minimum balance requirement of $25,000 for stock lending.
Additional Information: Fidelity is recognized for its diverse investment options and easy-to-use platforms, although it may have higher fees for certain trades.
3. Interactive Brokers
Program Highlights: Interactive Brokers offers a 50-50 revenue split with investors and requires a $25,000 minimum balance for stock lending.
Additional Information: Interactive Brokers is lauded for its extensive investment selection and advanced trading platforms, but may be more suitable for experienced traders.
4. Charles Schwab
Program Highlights: Schwab offers a 50-50 revenue split and requires a minimum balance of $100,000 for stock lending.
Additional Information: Schwab is highly regarded for its IRA options and diverse fund selections, although it may have limitations in certain areas.
Other Brokers Offering Stock Lending
While the brokers mentioned above provide favorable stock lending terms, many other brokers also offer similar programs. These brokers may have higher minimum balance requirements or different revenue splits.