What is stock lending

Stock lending, also known as stock collateral lending or securities lending, is a practice where an investor borrows stocks from another party and sells them with the agreement to repurchase the same stocks at a later time. Here's how it works:

1. Borrowing Shares: The investor who wants to engage in stock lending approaches a broker or a lending institution and requests to borrow shares of a particular stock. The borrower typically uses the shares as collateral for other investments.

2. Selling Shares: Once the shares are borrowed, the investor sells them, receiving cash proceeds. This process is called a short sale. The investor can sell the shares even if they don't have them in their possession, as long as they have the right to borrow them.

3. Repurchasing Shares: The investor agrees to repurchase the same shares at a later time, at an agreed-upon price. This price is typically higher than the initial sale price, allowing the investor to make a profit if the stock price increases during the period of borrowing and repurchasing.

4. Paying Fees and Costs: The investor pays a fee to the lender for the use of the shares. This fee can be a fixed rate or a percentage of the transaction value. Additionally, the investor may have to cover other costs, such as interest on borrowed funds or maintenance fees for the collateral.

Stock lending allows investors to profit from short-term price movements or to gain exposure to stocks they may not be able to afford to buy outright. However, it also involves risks, such as the potential for losses if the stock price declines or if the lender fails to deliver the shares.