We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Securities Lending?

Gerelyn Terzo
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Securities lending is the transfer of ownership of stocks, bonds, or other assets from one party to another. A lender may participate in this activity to generate gains from a portfolio. Lenders retain ownership rights, but forfeit any voting benefits that might otherwise be granted to shareholders if the borrowed assets are stocks. The borrower becomes legally responsible to return securities that are similar in design and value of the borrowed assets after the term of the loan to the lender. Collateral, including cash or bonds, valued at least the size of the loan is typically used to offset some of the risk.

There are several types of investors who participate in securities lending, although the practice typically takes place among institutional investors that oversee large sums of other people's money more than it involves individual investors. Mutual fund managers, public and private pension funds, as well as endowments and foundations are all active in the practice of securities lending. Typical borrowers might include prime brokers, which are entities that lend money and securities to hedge funds; trading desks at large banks that trade the bank's own money; and hedge funds. Securities lending trades are facilitated by a third party, such as a broker dealer or custodian bank.

Mutual fund managers and other investment advisers oversee baskets of securities for investors and are paid to preserve and grow wealth over time. A manager might opt to participate in securities lending as a way to generate some short-term gains. Other reasons might be to increase overall returns in a portfolio or to offset other investment costs.

Some hedge fund managers are in the business of trading shares they do not own in attempts to bolster returns on a trade. A manager might borrow securities from a prime broker to hedge a position in a trade. There are also some investment strategies that rely on securities lending more heavily, including pairs trading. In this strategy, for every bet a manager makes that a stock will rise, he makes another bet that a similar security will drop in price, which is a way to hedge investments. Some of these trades might be made from a fund manager's own money, but undoubtedly some of the securities will be borrowed given the numerous trades that are involved.

Investing carries no guarantees, and securities lending is no different. Risks include the possibility that a borrower will default on a loan and fail to deliver the promised securities after the term of the contract. This is known as counter-party risk, and a lender can attempt to mitigate this exposure by performing extensive credit checks and performing daily assessments on the value of the borrowed securities.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Gerelyn Terzo
By Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in Mass Communication/Media Studies, she crafts compelling content for multiple publications, showcasing her deep understanding of various industries and her ability to effectively communicate complex topics to target audiences.
Discussion Comments
Gerelyn Terzo
Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.