Submitted by nsscadmin on
A popular online brokerage recently began offering securities lending to their customers. Securities lending is not a new phenomenon, but as some investors may be hearing about it for the first time, and it’s been a trending topic, we figured investors may want an unbiased basic rundown of how it works.
Before we begin, as always, the Nova Scotia Securities Commission does not provide investment advice. We are not advising or recommending investors to begin securities lending. This post is simply to educate investors on securities lending so they can be informed when working with their broker and making investment decisions.
As the name suggests, securities lending occurs when an investor lends their securities, such as stocks, to another investor, through a brokerage. Most securities lending involves stocks, but securities lending can also include commodities, derivatives, or other types of securities. Some of the reasons someone may borrow securities includes short selling, hedging, and arbitrage.
Generally, when you lend securities that you have paid for, you retain ownership of those securities. The borrower is charged a fee by the brokerage for borrowing the securities. The lender of the securities receives a payment from their brokerage, the size of which is determined by the securities they have loaned out.
One of the main benefits of lending securities is that it provides another way for an investor to earn a return from their securities besides the usual capital gains, dividends, or interest payments. There are also a few drawbacks and risks to be aware of before you begin loaning out your securities.
- Securities owners lose voting rights when stocks are loaned
Depending on the type of securities you own, they may give you voting rights at company meetings. If you loan out your securities, you will also transfer your voting rights to the borrower who will retain them as long as they hold your shares.
- Tax complications
There can be tax complications with respect to who owes taxes on loaned securities. This could be taxes for dividends, capital gains or fees connected to the loaned securities. Always get professional tax advice before entering into a securities lending agreement.
If you’re thinking about lending your securities, make sure you understand all of the terms and conditions beforehand. These may differ among various firms.