Securities lending is the act of temporarily transferring securities from one party to another. The borrower typically pays a fee for this service, which is used to offset the costs incurred by the lender. Securities lending can be an essential tool for investors, allowing them to gain exposure to certain assets without purchasing them outright.
Traders can access difficult-to-borrow securities
Securities lending can be beneficial for traders who wish to short-sell certain assets. Short selling is the practice of selling borrowed securities in the hope of repurchasing them at a lower price to profit from the price difference. However, you cannot simply sell all securities short – some may be difficult to borrow due to high demand or other reasons. In such cases, securities lending can provide access to the desired asset.
Investors can generate additional income
Securities lending can be an attractive option for investors seeking to generate extra income from their portfolios. The borrower typically pays a fee for this service when lending out securities. This fee is then paid back to the investor, providing them with an additional source of income.
It can help to offset the costs of investing
For investors who incur costs when buying and selling securities, securities lending can help to offset these expenses. When securities are lent out and fees are collected, these fees can be used to cover the costs of trading, resulting in net cost savings for the investor.
It can provide access to otherwise unavailable assets
In some cases, securities lending can provide access to otherwise unavailable assets. For example, if an investor wishes to short-sell security that is not easily borrowed, they may be able to find a lender willing to lend the desired asset.
It can help meet collateral requirements
Some financial transactions require collateral, which can be posted as cash or other securities. If an investor doesn’t have the necessary collateral, they may be able to borrow the required assets through securities lending.
Lenders can earn interest on idle cash balances
For investors who hold idle cash balances in their portfolios, securities lending can provide a way to earn interest on these funds. By lending out cash, investors can earn interest payments from the borrower that can offset the costs of holding the cash balance.
It can help to diversify portfolios
For investors looking to diversify their portfolios, securities lending can provide access to a broader range of assets. Investors can add new asset types and reduce their overall portfolio risk by borrowing securities not already in the portfolio.
It can provide exposure to foreign markets
Securities lending can be an attractive option for investors who wish to gain exposure to foreign markets. By borrowing securities that are not easily traded in the domestic market, investors can access a broader range of assets and diversify their portfolios.
Disadvantages to securities lending
It can be a complex process
Securities lending can be complex, and investors may need to work with a broker or financial professional to arrange the loan. For instance, short selling can be complicated because it involves borrowing securities and then selling them, which requires knowledge of both the securities market and the lending process.
There is risk involved
There is always risk involved when lending securities, as borrowers may default on their loans, or the security value may decline. In some cases, investors may be required to post collateral to secure the loan, which can be risky if the borrower defaults.
It may incur costs
While securities lending can generate additional income for investors, there are also costs associated with the process. For instance, investors may need to pay fees to brokers or financial professionals to arrange the loan. In addition, investors may be responsible for paying any taxes on the income generated, and investors may need to post collateral to cover the loaned securities.
There may be restrictions
There may be restrictions on securities lending, depending on the country or market in which the securities are traded. For instance, some countries prohibit short selling, limiting investors’ ability to borrow securities. In addition, some markets may restrict the types of collateral that investors can post.
Visit https://www.home.saxo/en-sg/accounts/securities-lending for more information on securities lending.