Securities Lending
Securities lending is the temporary loan of stocks, bonds or other securities to another party, who posts collateral and pays a fee. It is the plumbing that makes short selling possible, and it earns extra income for long-term holders.
Every short sale starts with a borrowed share. Behind the scenes, pension funds, index funds and brokers lend out shares they hold, collect collateral and earn a fee. This market is huge, mostly invisible, and directly linked to borrow costs, short squeezes and even your broker's lending programme. This entry explains how securities lending works and what it means for investors.
- Category
- Market Structure
- Reading time
- 4 min
- Also called
- Stock lending, Share lending, Fully paid lending
- Updated
Securities lending in plain words
Securities lending is lending a stock, bond or derivative to another firm or investor, with the borrower posting collateral.1
Collateral can be cash, bonds, shares or a letter of credit, usually worth at least 100% of the loaned security, and the borrower pays a lending fee.1
In a short sale, an investor borrows shares and sells them, hoping to buy them back later at a lower price.2
How a securities loan works, step by step
Lender holds shares
A fund, insurer or broker client.
Borrower requests a loan
Often to cover a short sale. See Short Selling.
Collateral is posted
Usually 100%+ of value. See Collateral.
Fee is agreed
Higher for hard-to-borrow stocks.
Shares can be recalled
The lender can ask for them back.
Shares are returned
Collateral and fees are settled.
Worked examples
Example 1 — Lending income
+$50k a yearA fund lends $10m of a stock at a 0.5% annual fee.
| Annual fee | 0.5% × $10m = $50,000 |
The borrower pays the lender a lending fee, typically monthly.1
Example 2 — Hard-to-borrow stock
−$1,000 feeA heavily shorted stock carries a 30% annual borrow fee; a trader shorts $20,000 for 2 months.
| Borrow cost | 30% × $20,000 × 2/12 = $1,000 |
Short sellers must borrow shares first, and scarce shares cost more to borrow.1 See Short Interest.
Example 3 — Collateral cushion
ProtectedA $1m loan is backed by $1.02m of cash collateral; the borrower defaults.
| Lender keeps | $1.02m collateral |
| Cost to rebuy shares | $1m (if price unchanged) |
| Outcome | Lender made whole |
Collateral worth at least the loan's value protects the lender if the borrower fails to return the shares.1
Securities lending vs repo
| Aspect | Securities lending | Repo |
|---|---|---|
| Main motive | Borrowing a specific security | Borrowing cash |
| Typical asset | Stocks, some bonds | Government bonds |
| Paid by | Borrower pays a fee | Cash borrower pays interest |
| See also | Short locates | Repo Market |
Why securities lending matters
Short selling
No borrow, no short. See Short Locate and Borrow Availability.
Extra fund income
Helps offset index fund costs.
Settlement
Covers delivery failures.
Squeeze signals
Rising fees flag crowded shorts. See Short Squeeze.
Advantages and disadvantages
Advantages
- Extra income for long-term holders.
- Makes short selling and price discovery possible.
- Adds market liquidity.
Disadvantages
- Borrower default and collateral risk.
- Lenders lose voting rights while shares are out.
- Fees can be shared unevenly with clients.
Going deeper
Read as far as you need. Each level builds on the one before it.
Short selling depends on it
Beginner
Short selling is one of the most common uses of securities lending, because a seller needs shares to sell.1
Fully paid lending programmes
Intermediate
Some brokers let retail clients lend their fully paid shares for a share of the fee. Read the terms on fee splits, recall and investor protection carefully. See Short Rebate.
Cash collateral reinvestment
Advanced
Lenders often reinvest cash collateral; poor reinvestment choices caused losses for some lenders in 2008, showing the hidden risk in this business.
Common mistakes
Ignoring borrow fees
They can erase short profits.
Forgetting recalls
Lent shares can be called back anytime.
Assuming lending is risk-free
Collateral and borrower risk remain.
Overlooking voting rights
Recall shares before key votes.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Securities lending is lending shares or bonds against collateral.
- The borrower pays a fee to the lender.
- It makes short selling possible.
- Scarce shares carry high borrow fees.
- Lenders keep collateral and borrower risk.
Frequently asked questions
Does my broker lend my shares?
Do I still get dividends on lent shares?
What is a hard-to-borrow stock?
Further learning
- Short Selling
Why shares are borrowed.
- Short Squeeze
When borrowed shares get scarce.
- Repo Market
The cash-lending cousin.
- Collateral
What protects the lender.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Securities Lending (opens in a new tab) Checked .
- Investor.gov (SEC). Investor Bulletin: An Introduction to Short Sales (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.