Earning Extra Income With Securities Lending

June 9, 2023

Lending your stocks to short sellers can generate extra income from your long-term holdings, but be sure you understand the risks and other considerations before you get started.

Most investors purchase a stock hoping it'll rise in value—but short sellers want the opposite.

Traders who believe a company is headed for a rough patch may try to "short" the stock, effectively speculating against the company's fortunes. To do so, they borrow shares and immediately sell them, with the goal of repurchasing them later at a lower price before returning them to the lender.

In order to profit from the potential discrepancy between the two prices, short sellers must first find shares to borrow—which is where securities lending comes in. Such programs allow individual clients to lend in-demand stocks to their broker, who then lends the shares to short sellers, with interest.

The main benefit of stock lending is its income potential. If your shares are loaned out—which may or may not happen based on market demand—you'll earn interest daily, including weekends and holidays, which you'll typically split with your broker. Most brokerage, retirement, and trust accounts are eligible, and you can terminate the agreement or sell your shares at any time, even if they're on loan.

"Stock lending can be an attractive way to boost total returns from a long-term investment," says Cameron Creel, a senior manager of securities lending at Schwab. However, it's important to note that loaned securities are not covered by the Securities Investor Protection Corporation, which safeguards customers if their investment firm fails.

Instead, some firms, including Schwab, post cash collateral to be held in custody for the client in the event of default. "Investment firm failures are rare but can happen," Cameron says, "so it's important to have this kind of protection as part of a securities-lending program."

Securities lending at Schwab

Eligibility: Households must have at least $100,000 in assets held in Schwab accounts.
Collateralization: Schwab posts cash collateral equal to the full market value of the securities on loan, which is paid to the investor in the event of the firm's failure.
Interest income: Although it can vary depending on demand and market conditions, interest income—which accrues daily and is paid out monthly—is generally split 50/50 between Schwab and the client.
Trading restrictions: None; clients may sell loaned securities at any time.

To learn more about Schwab's Securities Lending Fully Paid program, call the specialized service team at 877-793-8872 or talk to your Schwab financial consultant.

Eligibility: Households must have at least $100,000 in assets held in Schwab accounts.
Collateralization: Schwab posts cash collateral equal to the full market value of the securities on loan, which is paid to the investor in the event of the firm's failure.
Interest income: Although it can vary depending on demand and market conditions, interest income—which accrues daily and is paid out monthly—is generally split 50/50 between Schwab and the client.
Trading restrictions: None; clients may sell loaned securities at any time.

To learn more about Schwab's Securities Lending Fully Paid program, call the specialized service team at 877-793-8872 or talk to your Schwab financial consultant.

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