Everything You Need to Know About Stock Lending

Stock lending (also called securities lending or fully paid lending) is a way to make extra income from the stocks you already own while you’re off doing more fun and important things. All you do is offer up your stock to traders who pay you to borrow it. It’s like Airbnb for your portfolio — and you don’t even have to change the sheets. Here’s a handy guide to help you understand how it works.

What is stock lending?

Stock lending is when you allow others to borrow stocks you own and, in return, get paid a fee, typically monthly. You are “renting out” your stocks so that others can use them to perform trading activities. If you’re not planning on selling a stock anytime soon, it’s an easy way to earn income while you wait for the stock’s value to appreciate.

Why would someone borrow a stock?

• To cover deficits or failed deliveries. Borrowed stocks can be used when an investor or a firm (because of delays or other reasons) needs shares to stay on the right side of regulations or their obligations under specific deals. 

• To use as collateral. Firms often need to pledge certain securities to banks in order to do business or to secure a loan. If they don’t own those securities, they can borrow them.

• To short the stock. If an investor thinks the value of a borrowed stock will go down, they can sell it, then buy it back at the lower price and pocket the difference.  

How does fully paid stock lending work?

Different brokerages use different systems, but at Wealthsimple we’ve tried to make it, well, simple. All you do is tap a button. You can choose to lend your whole portfolio or just individual stocks. Once you activate your account for lending, other financial institutions can see that your stocks are available and they’ll borrow them based on demand. 

For example, let’s say a borrower wants to short a stock that you own. They borrow the stock from a broker and sell at its current price, then buy the same number of shares back later, ideally (for them) when it costs less. If the price drops, they pocket the difference and return your stock. If the price goes up, they have to buy it at the higher price and return your stock. No matter what happens, they’re on the hook for returning your shares to you. 

What are the benefits of securities lending? 

For stock owners, stock lending offers a relatively low-risk way to earn extra returns on the stocks you already own. You maintain ownership of your stocks the whole time, so nothing really changes for you. If loaned stocks go up in value, those returns are still yours. If you decide to sell your stocks while they’re loaned out, you can. And if you ever decide you want your stock back, you can do that too. Different brokerages have different requirements for doing it, but at Wealthsimple you can opt out of loaning individual stocks or your whole portfolio in the app — just as easily as you opted in. 

For borrowers, stock lending provides a way to use or trade on a stock without buying it, which has the advantages we listed above.

How much money can I make with securities lending? 

As in most of finance, demand determines how much money you’ll make. Since we’ve been talking about short selling, let’s use that as an example: If you own a stock that a lot of short sellers want — the more volatile a stock is, the more appealing it tends to be to short sellers — you’ll earn more for loaning it. 

For example, say you own 300 shares of a particular stock that’s trading at $20 and is in high demand for borrowing. That gives you a notional value of $6,000. Stock lending providers often split the earnings 50/50 with clients, so if lending returns are 8%, assuming traders were actively borrowing that particular stock all year (and it traded at $20 the whole time), you could receive 4% of $6,000, or $240. And all you had to do was… nothing.

Which stocks qualify for fully paid stock lending?

Many stocks qualify, but short sellers tend to be most interested in the ones that are inclined to fluctuate. So: GameStop, AMC, Bed Bath & Beyond, BlackBerry Limited, etc. You certainly wouldn’t want to select your portfolio based on what short sellers want — one good reason is that the short sellers are predicting the stock’s price will fall, and you probably don’t want a portfolio filled with assets people think will fall — but if you happen to have a bunch of that type of stock, you have more potential to lend than someone who has only relatively stable mutual funds. 

I own a bunch of Apple stock. Can I lend that?

You can try, but because of AAPL's strong historical performance, not nearly as many people are interested in borrowing it.

Can I make any money lending something like an index fund or ETF?

It’s possible but unlikely. Index funds and other relatively stable stocks are eligible for lending, but people may just not be interested in borrowing them. 

Who can participate in stock lending? 

That depends on the institution you’re lending through. Most banks require potential lenders to have $50,000 – $100,000 invested to even be eligible. If you don’t mind a little self-promotion, Wealthsimple is the first Canadian company to have no minimum lending balance. If you’re invested in stocks with Wealthsimple — in either a Tax-Free Savings Account (TFSA) or a personal account — you can hit a button and begin loaning right away. 

What are the risks of stock lending?

Although small, there is a chance that a borrower could go bankrupt — maybe the asset they borrow from you increases so much in price that they can’t afford to buy it back and return it to you. If that were to happen, the Canadian Investor Protection Fund does not provide any coverage for fully paid securities lending transactions. As an alternative to protect lenders, traders are required to put up collateral worth at least 100% of the value of the stocks they borrow. That way even if the borrower does go bankrupt, lenders are fully protected.

It’s not exactly a risk, but in some stock lending programs, any dividends earned on U.S. stocks while they are on loan will be taxed at a higher rate. (Rather than capital gains, those dividends are treated as income and taxed at your income tax rate.) To avoid this headache, Wealthsimple does not allow trades on dividend-paying US stocks. 

Another potential drawback relates to voting rights. While your stocks are on loan, you’ll lose the power to vote at annual meetings, on corporate actions, or for board seats. This mostly applies to people with a heck of a lot of stock in a particular company who are normally involved in the way it is run. If that’s you, you might want to think twice about lending those stocks. But many investors don’t vote anyway, making this a nonissue for them.

You can find more detailed information on the risks of stock lending here.

What if I want my stocks back while they’re lent out?

Because you own the stock throughout the loan, you can always opt out of lending an individual stock or the whole program. 

How do I get started?

It depends on the brokerage. A lot of programs in Canada force you to call and talk to a representative. But with Wealthsimple, just head to the app and do the following:

1. Tap the Invest tab at the bottom of your screen.

2. Choose a trading account you wish to loan stocks from.

3. Scroll down to Introducing Stock Lending and tap the arrow icon.

4. Read through the information provided, then tap “Continue to Agreements.”

5. You will see a new set of account agreements with Stock Lending included.

6. Review the new agreements, check the box that you agree to the Stock Lending agreement, and tap “Confirm” to participate.