Traders often speak of “shorting stock” by “borrowing shares.” Most clients probably know the goal is to profit from a drop by selling high now and buying low later.
But how often do we think about the other side of the trade? After all, a short seller must borrow shares from somewhere. And, just like any other loan, it costs money.
This is why you need to know about TradeStation’s Fully Paid Lending Program (FPLP). Starting this summer, equities brokerage account holders can start making money by lending out stocks in their portfolios.
Customers only need to have $75,000 of liquid net worth or five years of trading experience to apply. Once you’re approved for and enrolled in the program, TradeStation may out lend securities from your account based on market demand. We’ll then share half the interest income generated. You still have the right to sell the stock at any time. Once the securities on loan are sold or if the loan is recalled, interest income stops accruing in your account.
What do you give up in return for the payment? One thing is you cannot exercise voting rights for company board members.
Secondly, income from lending a stock is considered “ordinary income.” (Taxed at the higher marginal rate.) It’s likely not a big problem when you’re collecting interest income but it can hurt on dividends.
The reason is that when a security you’ve lent out has a dividend, the borrower must pay that dividend to you. Their payment to you is treated as ordinary income, with a potentially higher rate than dividend income received directly from the company.
Customers considering FPLP should also consider why someone would short a stock in the first place? The answers could make you more interested the offer.
The first reason is simple bearishness. You own Company X and want to profit from it going up. Someone else thinks Company X is going down. Without FPLP you’ll only make money from the shares climbing. With FPLP you’ll also make money from someone else being wrong, and you being right.
Furthermore, say you’re wrong and they’re right. Say Company X does push lower. In that case at least you get paid something.
Stocks also get shorted as part of normal operations in the market. Say, for instance, someone sells calls against stock they own. That forces a market maker to buy the calls, which makes him or her “long the stock.” If they don’t want that risk, they can “hedge their exposure” by shorting the stock. They’re not bearish, they’re just neutral.
In other cases, an insurance company or pension fund may know it will need cash at a certain point in the future to pay beneficiaries. If it wants to lock in certain funding levels at a specific moment in time, it may sell short companies it owns and then deliver shares in the future from its own portfolio.
These kinds of operations are boring and commonplace — like a food company delivering cans of beans to your grocery store. They’re just ordinary operations of the market that have happened forever.
The good news is that now clients can benefit from transactions like this with FPLP.
Remember, the program isn’t a sure thing because there’s no guarantee of market demand for your shares. And, it requires that clients sign up. Please visit our FPLP page for more information.