The practice of securities lending is a well-established one that has been around almost as long as stock markets have. It's commonly practiced by traders and lenders of all shapes and sizes and plays an essential role in the functioning of the global economy.
If you want to know what is securities lending, the practice works relatively simply. Say a trader is convinced that the stock of a certain company is going to drop in value. They can simply ask a securities lending program to loan them the stock for them to sell.
Once the price does drop, the trader can buy it at a lower price, then wait for the price to rise again before selling it back to the brokerage. The profit is made by the trader pocketing the difference in share price.
To participate in securities lending and borrowing, you need a securities lending program you can trust. They should facilitate exchanges quickly and efficiently. Here are the most important things to keep in mind when choosing a securities lending program.
Stock lending is governed by a vast and diverse regulatory network that differs from country to country. In order to be an eligible borrower, you'll need to make sure you can legally operate with a program in accordance with their own terms and conditions.
Local rules and regulation in the country you wish to operate in will dictate your eligibility to a large extent. Different programs also request that a potential borrower is able to prove their eligibility.
This means you'll typically need to be able to provide tax records, assets, and evidence of your previous trading history.
When it comes to securities lending transactions, it's vital to choose a securities lending program with a solid reputation. There are endless horror stories out there of certain lenders having no capital of their own. This means they won't be able to help you out if a loan deal goes sour.
Some also charge extortionate interest rates of as high as 10%. You also need to make sure that your lender doesn't have any history of possible securities fraud. Choosing them could also make you liable for criminal activity.
You'll want to choose a program that is 100% transparent. One that doesn't try to trick potential borrowers with false information about the stock market. Lastly, it's important to make sure the program is well-funded with plenty of capital at hand.
Different securities lending programs offer different terms. Therefore, you'll want to pick terms that are most favorable to you and the kind of trade you wish to conduct.
Be wary of choosing a lender that takes over complete title ownership of securities, as this will affect how much you make. A lender is only supposed to do this if the borrower goes into default. And if there is no possibility of reaching an agreement between the relevant parties.
Find out how much you're able to borrow and when, as well as the terms for payment and collateral. Once you have this knowledge, you'll be able to choose the right program for you.
To learn more about choosing a securities lending program that works for you, make sure to get in touch with one of our experts today.
The stock loan market is full of lucrative possibilities, so reach out in order to be equipped with the knowledge you need to trade wisely.
The information contained herein is presented solely for the purposes of discussion and under no circumstances should this be considered an offer to buy or a solicitation of an offer to sell any security. Stock Loan Solutions is not a registered securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. Stock Loan Solutions, its managers or affiliates have not been registered and do not plan to be registered under the Investment Advisers Act of 1940 or any similar state or foreign securities laws. Stock Loan Solutions is not registered under the Investment Company Act of 1940 or under any similar state or international securities laws. Stock Loan Solutions does not offer any form of investment (buy or sell) advice, tax counseling, estate planning, or any other securities or financial advice whatsoever. No statements on this website or any verbal or written statement by any representative shall be construed as such advice. We are neither licensed nor qualified to provide investment advice.
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