The concept of share lending and borrowing is gaining more popularity each year, but there are many pitfalls to avoid. Here are some important things to remember when engaging in share lending and borrowing. If you're an investor, make sure you understand the risk. In the long run, it's better to invest in a diversified portfolio of stocks and bonds. You can also use share lending as a way to get exposure to new companies, especially startups.
The practice of securities lending and borrowing requires that the borrower offer collateral in exchange for the loan. This collateral can be cash, another security or a letter of credit. When the securities lending and borrowing are transferred to the borrower, title is transferred to the borrower. The brokerage charges a fee for the loan, and the interest rate depends on the amount of securities lent. A Securities Lending Agreement must be signed before a security can be borrowed. The brokerage will then return the borrower's dividends and any outstanding balance to the lender.
Securities lending is a complex process. In addition to the lender paying fees, the borrower is responsible for paying interest and fees to a lender. Borrowers are often under pressure to sell their securities lending at a higher price than they borrowed. The lender will be paid a fee if the securities lose value, but this is far less common than selling them for less than the loan amount. It's not uncommon for investors to default on a loan if the market recovers from the short sale.