Stock Loan Fee

What Is a Stock Loan Fee?

A stock loan fee, or borrow fee, is a fee charged by a brokerage firm to a client for borrowing shares. A stock loan fee is charged compliant with a Securities Lending Agreement (SLA) that must be completed before the stock is borrowed by a client (whether a hedge fund or retail investor).

A stock loan fee can be diverged from a stock loan rebate, which is payment received by the individuals who lend stock to other people.

How a Stock Loan Fee Works

The stock loan fee amount relies upon the difficulty of borrowing a stock — the more troublesome it is to borrow, the higher the fee. As short sellers quickly sell the borrowed stock, the borrower must console the lender by providing collateral like cash, treasuries, or a letter of credit from a U.S. bank. In the event that the collateral is cash, the interest paid by the stock lender on it to the borrower might offset part of the stock loan fee.

Most shares held by brokerage firms for the benefit of their clients are in "road name," and that means that they are held for the sake of the brokerage firm or other nominee as opposed to for the sake of the client. This way the brokerage can loan the stock out to different investors.

Stock is generally borrowed to make a short sale. The degree of short interest, subsequently, gives an indication of the stock loan fee amount. Stocks with a high degree of short interest are more challenging to borrow than a stock with low short interest, as there are less shares to borrow.

Stock loan fees might be worth paying while short selling is lucrative, yet traders ought to continuously make certain to factor them into the gamble/reward ratio of their trades.

Stock Loan for Short Selling

A short sale includes the sale of borrowed securities. These securities must be first found and loaned to the short seller in a margin account. While the shares are being borrowed, the short seller must pay interest and different charges on the loaned shares.

The goal of the short seller is to sell the securities at a higher price and afterward buy them back at a lower price. These transactions happen when the securities borrower accepts the price of the securities is going to fall, allowing them to produce a profit in light of the difference in the selling and buying prices. No matter what the amount of profit, if any, the borrower acquires from the short sale, the settled upon fees to the lending brokerage are due once the agreement period has ended.

Rights and Dividends

At the point when a security is moved as part of the lending agreement, all rights are moved to the borrower. This incorporates voting rights, the right to dividends, and the rights to some other distributions. Frequently, the borrower sends payments equivalent to the dividends and different returns back to the lender.

Special Considerations

The stock loan fee is a frequently ignored cost associated with shorting a stock. While short selling can be lucrative on the off chance that the trader's view and timing are right, its costs can be very significant. Apart from the stock loan fee, the trader needs to pay interest on the margin or cash borrowed for use as collateral against the borrowed stock and is likewise committed to make dividend payments made by the shorted stock.

Traders who are thinking about short-selling a stock ought to carefully consider these fees while deciding the risk/reward ratio of their trades to keep away from any unforeseen shocks.

Illustration of a Stock Loan Fee

Expect a hedge fund borrows 1,000,000 shares of a U.S. stock trading at $25.00, for a total borrowed amount of $25 million. Additionally, expect that the stock loan fee is 3% each year. The stock loan fee on an every day basis, expecting a multi day year, is hence ($25 million x 3%)/360 = $2,083.33.

Highlights

• The more troublesome it is to borrow the stock, the higher the fee.
• Traders ought to carefully think about the gamble/reward ratio of trades in terms of associated fees before executing a short sale strategy.
• Stock loan fees are charged to clients of brokerages for borrowing stock. This is ordinarily finished for the purposes of short selling.