In periods of volatility, some traders bet against certain stocks via short selling — a maneuver in which they borrow shares, sell them, and then try to buy them back at a lower price later, pocketing the difference. But who lends them the shares in that situation?
Well, you do — if you participate in your broker’s stock-lending program. Here’s what to know about these programs, and which brokers offer them.
What is stock lending?
Stock lending, also known as fully paid securities lending, is an opt-in program that lets you earn interest by lending investments you own to your broker, who in turn lends them out to short sellers.
Most brokers offer it on an all-or-nothing basis, meaning you can’t choose which stocks you’re willing to lend — you can only turn stock lending on or off for your entire account. That said, your broker might not lend out your stocks if there isn’t enough demand for them.
If you opt into stock lending, you still have control over the shares or other assets you’ve lent out, and can sell them at any time. What you don’t have control over are changes to your voting rights, how your investment income is taxed, and the amount of protection you have in the event of broker insolvency. (More on that below.)
I recently got interested in stock lending after Robinhood prompted me to turn it on, plying me with the promise of extra returns. I ultimately did so — but not until I had dug through the terms and conditions and risks of the practice. Here’s what I learned.
What to know about stock lending
Depending on which broker you use, stock lending may not be available to you if you have a small balance (many brokers set a minimum of $5,000 or more), and even if you qualify, there are some caveats to consider before turning it on:
Rates vary, and are usually pretty negligible. I’ve had stock lending enabled in Robinhood for about a month, and I’ve earned $0.00 from it. A few things affect the amount you can earn from stock lending. One is the percentage of revenue your broker keeps. (Robinhood is on the greedier side here, keeping 85% of stock-lending revenue, while other brokers, such as Charles Schwab, do a 50-50 split with the user.) Another is the demand for loaned shares of the particular stocks you own. Some highly volatile stocks, such as Lucid Motors (LCID), can pay rates of 5% or more per year via stock lending, but many other stocks pay only a fraction of a percentage point.
You may temporarily lose your voting rights. When you lend out a stock, the borrower gets your voting rights on the company board for the duration of the loan. I don’t think I’ve ever voted as a shareholder in any company, so this isn’t a major concern for me.
If you receive dividends on loaned shares, they’re taxed as ordinary income. There are special tax rates on most dividend payments that are lower than typical income tax rates, but if you’re lending out a dividend stock, you receive a cash payment in lieu of your dividends. It’s the same amount of money, but it doesn’t qualify for that reduced tax rate; it’s taxed at your normal income rate.
Loaned shares aren’t subject to Securities Investor Protection Corporation (SIPC) coverage. In a typical brokerage account, investors are protected against the risk of losing their money due to broker insolvency by SIPC insurance, which covers up to $500,000 per account, of which up to $250,000 can be cash. However, if your broker goes belly-up and you have shares out on loan at the time, those loaned shares are not covered by SIPC.
A heads up: Whenever we mention SIPC coverage in a NerdWallet article, we like to emphasize that it also does not cover losses due to unsuccessful investments — only losses due to your broker going out of business. But again, you may not even get coverage for that if you’re doing stock lending.
Which brokers have the best stock lending programs?
Four of the brokers reviewed by NerdWallet offer stock lending programs that share at least 50% of revenue from stock lending with investors and have account minimums of $100,000 or less. They’re listed below.
TastyTrade
The stock lending program: TastyTrade stands out among the brokers we review that offer stock lending programs, because it offers a 50-50 stock lending revenue split with investors and has no minimum account balance to participate.
Other things to know: TastyTrade offers cheap options trades and a powerful interface for advanced traders, but it’s a bit weak in the research department, pays little interest on uninvested cash, and can be hard-to-navigate for beginners. Check out our full TastyTrade review for more info.
Fidelity
The stock lending program: Fidelity has among the most generous revenue splits of any stock lending broker we review — it keeps just 40% of stock lending revenue, and gives you the other 60%. Its minimum balance for stock lending is slightly higher than TastyTrade’s, at $25,000, though many brokers still have higher minimums.
Other things to know: Fidelity often wins several of NerdWallet’s Best-Of awards for investing products due to its wide investment selection and easy-to-use platforms. However, it has somewhat high fees for options trades and broker-assisted phone trades. Learn more in our full Fidelity review.
Interactive Brokers
The stock lending program: Interactive Brokers splits revenue from stock lending 50-50 with investors and requires a $25,000 minimum balance to participate.
Other things to know: Interactive Brokers often wins NerdWallet’s Best-Of award for advanced trading brokerages due to its absurdly wide investment selection, deep research library and powerful, customizable platforms. However, those platforms are geared toward seasoned investors and can be intimidating for beginners. See our full Interactive Brokers review to learn more.
Charles Schwab
The stock lending program: Schwab offers a 50-50 stock-lending revenue split and has a minimum balance of $100,000 for stock lending.
Other things to know: Schwab is another frequent NerdWallet award winner, especially in the IRA account and robo-advisor categories, largely due to the diversity of funds it offers. However, it pays little interest on uninvested cash, and has an Android app that has gotten mixed reviews. Get the full scoop by reading our full Charles Schwab review.
Other brokers that offer stock lending
The brokers above are not the only ones that offer stock lending — they just have the lowest minimums and best revenue splits among the brokers reviewed by NerdWallet. In fact, most of the brokers we review offer a stock lending program. Here are all the others (which may have higher minimum balances, or keep more than 50% of stock lending revenue):
-1024x768.jpg "Red Snapper Used as Cudgel by Fed Judge")
