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.
 

877-793-8872 or talk to your Schwab financial consultant.
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  • 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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  • 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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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal. 

Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information, please refer to your account agreement and the Margin Risk Disclosure Statement.

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