Banks make money by lending money. Did you know the same thing can be done with stocks held in your portfolio?
TradeStation Securities’ Fully Paid Lending Program lets investors collect income without any work on their part. Aside from having a normal brokerage account, they only need $25,000 of total net worth or a single year of trading experience.
It works because there is often demand in the market for borrowed shares. If a trader sells a stock short, he or she needs to borrow it before selling. If that stock is in your account, TradeStation 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 and shares lent out aren’t protected by the Securities Investor Protection Corporation (SIPC).
There are a few reasons why someone might borrow stock to go short.
Securities Lending and Selling Short
One reason to sell short is simple bearishness. You might own a company and want to profit from it going up, but someone else thinks it’s 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, if you’re wrong and they’re right, you could still earn something by allowing it to be lent.
Stocks also get shorted as part of normal operations in the market. For example, investors often sell calls against stock they own. A market maker has to buy those calls, which makes him or her “long the stock.” They can manage that risk by shorting it to stay 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 added to the program if eligible. Existing customers who opened their accounts before February 15, 2019, need to enroll via the Client Center.
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 this market without any effort of your part.
Shares lent out are not protected by SIPC. When shares are lent out, you’ll receive cash payments in lieu of dividends; these payments are treated as ordinary income rather than taxed at the dividend rate. Loan income is taxed as ordinary income. There’s no guarantee that your portfolio’s eligible securities will be lent out, as there may be no demand for the securities. When securities are on loan, you lose your ability to exercise voting rights. Other risks are outlined in the Fully Paid Stock Lending Risk Disclosures.