Did you know that more than 50% of Americans now own stocks? Or that wealthy U.S. investors keep between 15% and 20% of their investments in bonds?
This is why the U.S. continues to have a booming market dedicated to borrowing and lending stocks and bonds. In fact, the U.S. accounts for 55% of the world’s securities lending activities. That’s a huge portion, considering that the global value of securities on loan in 2018 was $2.6 trillion.
Now the question is, what exactly is securities lending in the first place? How do investors profit or benefit from bonds and stock loans?
We’ll answer all these questions (and more), so be sure to keep reading to learn about this lucrative market!
A Quick Overview on Securities Lending
Securities lending is the practice of borrowing and lending securities. The most common securities “loaned” and “borrowed” are stocks. But lending of bonds and mutual funds have also become more common.
Investment companies are often the primary lenders and borrowers in these activities. However, anyone who owns stocks or has a brokerage account can secure these loans.
How Stock Loans Work
With a stock loan, the owner uses the stock as a form of collateral to take out a loan. The other party provides a loan against the stock and charges an interest rate in exchange for the funds.
In this way, stock loans are much like traditional types of secured loans, like mortgages. With a mortgage, a home serves as the collateral. With stock loans, the collateral or security is the stock (or other securities like bonds).
But unlike mortgages, a stock loan involves a temporary transfer of stock ownership. Upon complete payment of the loan, the lender transfers back the ownership to the stock owner.
Factors That Influence the Stock Loan Amount
The amount of money one can get from a stock-secured loan depends on the stock itself. These include the number of shares, market volatility, and the current price of the stock. Also, the more in demand the stock is, the higher the stock loan price.
The Main Purposes of Securities Lending
Short selling is the primary reason securities lending takes place. This is the practice of selling a security that an investor doesn’t own but has “borrowed”. These investors borrow these securities and sell them immediately after.
All short-sellers aim to make profits by selling high and buying low. For instance, an investor thinks that a stock will go down soon. In the hopes of making profits, they will sell the stock before that happens.
If their market prediction comes to pass, then they would have made profits. They will then buy back the securities while their price is still low.
To make it easier to understand, let’s use an example where you’re a short seller.
Say that X stock is currently trading at $100 a share, but you believe that it’s dropping to $80. If you owned any X stock, you’d sell it before it goes down and then buy it back later while it’s still low. The problem is, you don’t have any shares with X company.
As a short seller, you can still make profits by borrowing 100 X shares from someone who owns them. Then, you can sell the borrowed shares for $10,000. If your prediction comes true, then you can buy back the shares for only $8,000, making $2,000 more during the process.
To compensate the stock owner, you’ll provide them a loan in exchange for the stocks you’ll borrow. This loan is an example of a stock loan.
Reasons to Consider Getting a Loan Against Your Stocks
What if you’re on the other end of the spectrum, being the stock owner? How do you benefit from a stock loan?
Gives You Access to a Capital
The same way you’ll benefit from more traditional loans — you’ll receive a capital. If you need access to capital ASAP but can’t sell your stock, then a stock loan can be a good choice. You’ll get the funds you need, and as soon as you pay off the loan, get your securities back.
You Need Extra Funds Right Away
Reputable companies offering stock loans provide you the quickest way to liquidate securities. Unlike selling them on your own, a stock loan can deliver the funds you need in as little as 48 hours.
You Can Use the Funds to Diversify Your Portfolio
You can then use the capital you receive to invest in other platforms. This allows you to diversify your portfolio, which then helps reduce your risks.
Keep in mind that 25% of US investors have no idea about the diversification of their investments. Or if they even have a diversified portfolio. This is a big mistake, as this can mean losing everything if the sole company they’ve invested in goes bankrupt.
Also, the more capital you have, the more creative you can be with your portfolio. You can invest in more stocks, bonds, and mutual funds from several other companies. This also prevents you from putting all your money in only one place.
Get Started on Securities Lending Now
As you can see, stocks are more than just an investment — they’re also a great way to secure loans. Stock loans offer a win-win situation for everyone involved. They allow short sellers to make profits while giving stock owners quick access to funds.
So, if ever you run into some funding issues, consider taking out a stock loan. Since you already have collateral, then it’ll be way easier to secure a loan.
Interested in more financial advice to keep your bank accounts healthy and strong? Then be sure to check out the rest of our posts filed under our site’s Money section!