securities lending
The temporary transfer of securities from one party (the lender) to another (the borrower) in exchange for collateral and a fee, enabling short selling.
Example
“Index funds earn extra income through securities lending, allowing short sellers to borrow shares in exchange for fees.”
Memory Tip
SECURITIES LENDING = lend your shares to short sellers, earn fees. Passive income for long-term holders.
Why It Matters
Securities lending affects the costs and availability of short selling, which can influence stock prices and market volatility. Understanding this practice helps investors recognize when significant short positions exist in stocks they own, potentially indicating downward pressure on the stock price.
Common Misconception
Many people believe that securities lending is only used by professional traders for short selling, but it actually serves other purposes like helping institutional investors earn extra income on their holdings by lending out shares they plan to keep long-term.
In Practice
A pension fund owns 10,000 shares of Company X worth 50 dollars each and lends them to a hedge fund for one month in exchange for 2 percent annual fee (about 83 dollars for the month) plus collateral of 515,000 dollars. The hedge fund uses these borrowed shares to short sell at 50 dollars, betting the price will fall to 45 dollars, while the pension fund continues earning dividends and the lending fee during this period.
Etymology
SECURITIES (financial instruments) LENDING (temporary loan). Temporarily LENDING financial SECURITIES.
Common Misspellings
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Related Terms
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See Also
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