How to earn more on your SGX stocks through securities lending (2024)

FAQs

How do you make money from securities lending? ›

Securities lending involves the owner of shares or bonds transferring them temporarily to a borrower. In return, the borrower transfers other shares, bonds or cash to the lender as collateral and pays a borrowing fee. Securities lending can, therefore, be used to incrementally increase fund returns for investors.

The main benefit of stock lending is its income potential. If your shares are loaned out—which may or may not happen based on market demand—you'll earn interest daily, including weekends and holidays, which you'll typically split with your broker.

Stock lending providers often split the earnings 50/50 with clients, so if lending returns are 8%, assuming traders were actively borrowing that particular stock all year (and it traded at $20 the whole time), you could receive 4% of $6,000, or $240.

Benefits of Securities Lending

In these transactions, the lender is compensated in the form of agreed-upon fees and also has the security returned at the end of the transaction. This allows the lender to enhance its returns through the receipt of these fees.

In a moneylender business, a lender provides cash to a borrower. The borrower pays interest, and they might even pay origination fees and other costs. As the borrower repays the loan, more capital is available for other loans, and the lender makes a profit from the interest they receive.

In a short sale transaction, a broker holding the shares is typically the one that benefits the most, because they can charge interest and commission on lending out the shares in their inventory. The actual owner of the shares does not benefit due to stipulations set forth in the margin account agreement.

Typical annualized rates can range from 0.2% to 5%, and it is not uncommon to see heavily shorted stocks reach 100%+. The interest rate for the borrower's collateral: The collateral is typically invested in low-risk liquid investments like treasury bills, which yield additional income.

By investing in shares, one can expect to earn through capital appreciation, i.e., on the gains made on the capital (principal invested) when the share price rises. The gains or the profits from shares can go as high as 100 percent or more. There is, however, no guarantee of capital appreciation.

The Fully-Paid Securities Lending Program gives eligible National Bank Direct Brokerage clients the opportunity to earn additional income by lending their fully paid securities held in their non-registered accounts.

“If you're lending a share of a stock that pays dividends, you no longer get the dividend payment,” Sideris explains. “Instead, you get cash equivalent to the dividend amount. However, the taxes are different for the cash payment, so you could have a slightly higher tax burden or even a more complicated tax burden.”

How much can you realistically make from stocks? ›

The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation.

Instead, they can take loans against their shares. Securities based lending, securities based lines of credit, home equity lines of credit and structured lending are options for leveraging assets without selling them.

Keep more of your money

Hard-to-borrow high-growth stocks usually trade at high lending rates. For example: LCID generated the most revenue in 2022, and often traded at 5%+ over the year. VISA, TSLA, UBER, LYFT, UPST are some of the highest earners over the last few years.

These are the money markets at the heart of the market-based financial system. While repo markets primarily enhance the efficiency of fixed-income markets, securities lending markets play central roles for both fixed-income and equity markets.

Naked shorting means selling a security without borrowing it first. Therefore, by law, when short selling a security, the seller must borrow it first. Securities lending is the process which enables short sellers to borrow securities and execute their short sales.

As with any loan, interest payments are made and then principal is paid back at maturity. However, with a mortgage-backed security, interest payments to investors come from the thousands of mortgages that underlie the bond — specifically, the repayments in interest and principal the mortgage-holders make each month.

DeFi lending protocols generate revenue primarily through interest fees charged on loans. They also often have their own native tokens, which can be used for governance, staking, or other value-capture mechanisms.

Most investment accounts hold a small amount of cash, and a broker sweeps that cash into a deposit account that earns interest. A small portion of that interest is paid to the investor, and the brokerage firm pockets the rest. Brokers also sell trades to market makers, which earns them a small fee per trade.