Stock lending is like Airbnb for your portfolio — but you never have to worry about washing the towels. Other investors essentially rent the stocks you own for a variety of reasons. While you won't have voting rights while your stocks are on loan, you can get paid a monthly fee, providing some passive income from stocks you're not planning on selling anytime soon.
What is stock lending?
Stock lending — also known as securities lending — is when you allow others to borrow stocks you own in return for a fee, typically paid monthly. You're "renting out" your stocks so that others can use them for various 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.
How does stock lending work?
Different brokerages use different systems. You can often 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.
Here's a simplified example: 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're required 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.
Why would someone borrow a stock?
There are several reasons, and some are more complicated than others.
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 cover deficits or failed deliveries. Firms can be required to hold a certain number of securities. Sometimes there's a delay in getting securities they were expecting, or some of the segregated securities have been lent or transferred. In those cases, firms will often borrow securities to meet their obligations.
To short the stock. If an investor thinks the value of a particular stock will go down, they can borrow it, sell it, and then buy it back at what they hope will be a lower price, pocketing the difference. Short selling is only one of many reasons people borrow securities, but it is by far the most well known. Empirical studies have found that short selling does not have a significant effect on stock prices.
To facilitate tight two-way pricing. Tight two-way pricing happens when the price buyers are willing to pay for a stock is similar to what sellers are willing to accept. The difference between the two is called the spread. Some brokerages, called market makers, try to keep the buy and sell prices close. If they need to sell stock they've offered up to keep the spread tight, they may borrow that stock to complete the order.
To exert influence. Firms may borrow shares to participate in corporate actions, like voting, with the goal of influencing management decisions.
Who can participate in stock lending?
That depends on your brokerage. Some institutions require potential lenders to have $50,000 – $100,000 invested to be eligible, while others have much lower minimums or no minimum at all. It's worth checking with your brokerage to understand their specific requirements, including which account types (non-registered, TFSA, margin) are eligible.
What are the benefits of stock lending?
For shareholders, stock lending offers a relatively low-risk way to earn extra returns on the stocks you already own. Here's what makes it appealing:
You maintain ownership. Your stocks are still yours the whole time they're on loan.
You keep your gains. If loaned stocks go up in value, those returns belong to you.
You can sell anytime. If you decide to sell your stocks while they're loaned out, you can.
You can opt out. If you want your stock back or want to leave the lending programme, you can do that at any time.
For borrowers, stock lending provides a way to use or trade on a stock without buying it, which supports the various trading strategies listed above.
What are the risks of stock lending?
When you invest with a registered brokerage in Canada, up to $1 million of your investments across eligible account types are protected by the Canadian Investor Protection Fund (CIPF). (It's similar to the CDIC coverage you get with deposits at financial institutions.)
With stock lending, there is a small risk that a borrower could go bankrupt — perhaps 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 CIPF does not provide coverage for that loss.
However, borrowers are required to put up collateral worth at least 100% of the value of the stocks they borrow. That way, even if the borrower goes bankrupt, lenders have some protection.
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. If you hold a large position in a particular company and are normally involved in governance decisions, you might want to think twice about lending those stocks.
How much money can you make with stock lending?
As in most of finance, supply and demand determine value. If you have a stock that a lot of people want to borrow, you'll earn more for loaning it.
Here's a simplified example: say you own 300 shares of a high-demand stock trading at $20. 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% — and traders were actively borrowing that particular stock all year at $20 — you could receive 4% of $6,000, or $240.
Which stocks qualify for stock lending?
Many stocks qualify, but short sellers tend to be most interested in ones that are inclined to fluctuate. You certainly wouldn't want to select your portfolio based on what short sellers want — they're predicting that the stock's price will fall, and you probably don't want a portfolio filled with assets people expect to decline.
Index funds, exchange-traded funds (ETFs), and other relatively stable investments are often eligible for lending too, but there tends to be less borrowing demand for them — so the income potential is usually lower.
How is stock lending income taxed in Canada?
When your stocks are on loan, any dividends paid by the company go to the borrower. Instead, you receive a "substitute payment" or "payment in lieu of dividends." While these payments are the same dollar amount as the dividend, they're typically taxed differently.
In a non-registered account, actual dividends from Canadian companies qualify for the dividend tax credit, which lowers the amount of tax you pay. Substitute payments are generally taxed as ordinary income — so you could end up paying more tax on the same amount of money.
In registered accounts like a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), this distinction usually doesn't matter, since investment income in those accounts isn't taxed while it remains in the account.
The monthly lending fees you earn are also generally treated as ordinary income for tax purposes. It's a good idea to consult a tax professional for advice specific to your situation.
How lenders are protected
Several protections are in place for investors who participate in stock lending:
Collateral requirements. Borrowers are required to post collateral — typically cash or government securities — worth at least 100% of the market value of the borrowed shares. This collateral is adjusted daily through a process called mark-to-market, so if the stock's price rises, the borrower must post additional collateral.
Regulatory oversight. In Canada, stock lending programmes offered by registered brokerages are overseen by the Canadian Investment Regulatory Organization (CIRO), which sets rules around collateral, disclosure, and investor protection.
Ownership rights. You retain beneficial ownership of your shares while they're on loan. You can sell them at any time, and if the stock increases in value, those gains are still yours.
Opt-out flexibility. You can recall your shares or leave the lending programme at any time, with no penalties.
Is stock lending right for you?
Stock lending can be a straightforward way to earn extra income from investments you're already holding. It tends to work well for investors who:
Hold stocks or ETFs for the long term and aren't planning to sell soon
Are comfortable with the small risk that a borrower could default (though collateral requirements reduce this risk significantly)
Don't need to exercise voting rights on their shares regularly
On the other hand, it might not suit you if you actively trade your holdings, hold a large position in a single company where voting matters to you, or are uncomfortable with any additional risk beyond standard market risk.
As with any investment decision, it's worth weighing the potential income against the risks and understanding how it fits into your broader financial plan.
