Is Stock Lending a Good Idea? (Pros and Cons) – Technologist

You’ve probably logged into your brokerage and received a popup notification or an email touting stock lending in the last year or two.

There’s loose change on the ground and you’re not picking it up, the message is. Don’t you want to make easy money without doing anything?

But is stock lending safe? How much money can you really make? And how does it even work?

What Is Stock Lending, How Does It Work and Is It Safe?

Stock lending is also known as securities lending.

You can rent out your stock shares for extra cash. But you still own the shares. Just like you’d still own a pressure washer that you rented out to the neighbor down the street for a weekend.

Your shares are sitting in your investment account. And stock lending allows you to make money on those assets.

Typically you’re lending your shares to your investment company temporarily in exchange for a fee.

The good news is you can still sell your shares at any time and realize your gains or losses.

“We’ve had this question a few times in 2024 from people because a lot of the brokerages are pushing this to clients,” Clark says. “The most aggressive about it is Fidelity Investments. And there is very low risk to doing stock lending.”

Investment companies borrow stock for various reasons, “including to facilitate trade settlements, for onward lending, or to use as collateral for other loans … it’s likely that such securities will be used to facilitate one or more short sales or satisfy delivery requirements resulting from short sales” as Robinhood describes its stock-lending program.

Stocks in high demand with low market availability are more likely to get borrowed.

You must have an account value of a certain size to participate in stock lending. The minimum amount is $25,000 at Fidelity, while Schwab says “most” accounts are eligible and 401(k) accounts are not.

How Much Money Will I Make Lending My Shares?

Show me the money!

This may be what you think when you participate in stock lending. But how much money will you earn?

For Fidelity and Schwab, that’s based on your annualized interest rate. Fidelity says it determines that rate “by several factors, including borrowing demand and short selling, and general market conditions.” Schwab says the rate is “based on demand.”

Robinhood says it gives you 15% “of the gross revenue generated by Robinhood when it lends out securities to the market.”

Holding stocks you’ve cleared for lending doesn’t mean your stocks will automatically get borrowed, either.

Since it’s hard to pinpoint how much you’ll get paid, and your income will vary month to month. Let’s let money expert Clark Howard characterize it qualitatively:

“Are you gonna earn big money lending your shares? Not unless you’ve got a very large portfolio will the money really move the needle a lot. But it is a recognized, legit activity.”

The Tax Downside of Dividends on Loaned Shock Shares

So far, the concepts of lending a stock have been simple. Sure, it’s hard to know exactly how much you’ll get paid, but typically it’s not much. And the mechanics of what happens to your loaned-out shares are complex, but you still own them and can sell or stop lending any time you want.

There is one snag you’ll run into if you loan out shares, especially for assets that pay dividends.

“The biggest problem is if it is in a regular investment account is that you will have discriminatory taxation on your dividends that you’re paid on your holdings that you’re lending to others,” Clark says.

“Because they’re not paid to you in the conventional way. And so where you might have a preferential tax rate on certain dividends, you’ll now be taxed ordinary income tax normally on the cash equivalent of dividends that you’ll receive.”

In other words, you’ll still receive the cash equivalent to the dividends you earn. But instead of getting those directly from the company in which you hold shares like normal, you may get the cash from your investment company. (Technically the borrower sends it to the investment company which sends it to you.)

“Qualified dividends” get you the lower tax rate applied to long-term capital gains. Manufactured dividends or “cash in lieu of dividends” are taxed at short-term rates (your ordinary income tax rate).

Final Thoughts

Stock lending is safe, easy and legitimate. But it isn’t lucrative.

If you’re the type of person who stops to pick up a few coins you see on the ground, you’ll probably love the extra trickle of money you get from lending stock. If you have a massive portfolio, your income can start to become significant from it.

Overall, it’s a real way to make money, but not a powerful one.

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