Most people know they can make money by lending money. Did you know the same thing can be done with stocks sitting in your portfolio?
TradeStation’s Fully Paid Lending Program lets investors receive income without lifting a finger. Aside from a standard brokerage account, they only need $25,000 of total net worth or a single year of trading experience.
How’s it work? There’s often demand in the market for borrowed shares. If a trader shorts a stock, they need to borrow it before selling. If it happens to be in your account, we can facilitate a loan and you could receive interest.
Investors participating in the program still have the right to exit positions at any time. However they lose the right to vote for company board members during the time of the loan. There can also be less advantageous treatment of dividends.
So why would someone want to borrow your shares to sell it short? Consider the reasons.
Short Selling and Stock Lending
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 Fully Paid Lending you’ll only make money from the shares climbing. With it, you can make money from someone else being wrong — and you being right.
Furthermore, say you’re wrong and they’re right. If Company X declines, you could still make something thanks to lending it.
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 staying neutral.
In other cases, an insurance company or pension fund may know it will need cash at a future date 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 stock later from its own portfolio.
Still, the program isn’t a sure thing because there’s no guarantee of market demand for your shares.
All new clients are automatically enrolled in the program if eligible. But if you opened your account before February 15, 2019, you’ll need to visit the Client Center to join.
In conclusion, borrowing and lending lie at the heart of finance. Most people only think of lending money, like with savings accounts or by investing in bonds. But there’s also a world of lending securities with the potential to profit. TradeStation’s Fully Paid Stock Program can let you benefit from these transactions without the slightest effort.