What is securities lending and can you make money?

Want to earn some extra passive income from your investments? With securities lending, you can make some bonus money by lending out your stocks and shares. A bunch of UK share trading platforms now offer this feature to retail investors. Is it too good to be true, or is it a legitimate way to add to any returns from your investment portfolio?

What is securities lending?

Securities lending (also known as “stock lending”, or “share lending” if you want to get less formal) involves lending out shares in your portfolio to borrowers (other investors). You can think of it like renting out your investments. Institutional investors or hedge funds usually look to borrow shares, and in return, you get paid a fee for lending out your stock.

You still retain ownership of the shares (so they’re still yours to keep), but a borrower can use them for short-term activities like short selling, or perhaps for meeting other financial obligations (like maintaining a certain level of liquidity). The borrower will then aim to return your shares at a later date, with an extra fee you can pocket while they’re lent out.

How does share lending work?

The exact process can vary slightly depending on your brokerage, but here’s a simple breakdown of how share lending works in the UK:

• Sign up and allow the option for share lending on your trading app.
• Your shares will be temporarily lent to borrowers (usually institutional investors).
• While your shares are being lent out, you still own the shares (and usually keep any dividends)
• The borrower will pay a fee, which you receive as income (usually split with your brokerage)

It can be a relatively low-maintenance way to earn extra cash from your portfolio, but it’s not without additional risks and potential pitfalls.

Who is best suited to stock lending?

In some cases, there is additional risk involved with securities lending. So this feature is best-suited to those who are happy with a bit of extra risk added to their portfolios. The level of risk is actually quite low in most cases because the people borrowing the shares are usually large institutional investors, not just some guy down the pub.

However, relative safety also means that the rewards are fairly low (even more so because you usually split 50% of the profit with the platform). Technology means lending (and to stop lending) your shares can be a relatively hassle-free process. So it is a simple way to generate more cash from your portfolio, but if you’re very risk-averse or not looking to maximise your returns it may not be worth the small amount of effort it takes.

How to lend your shares

Here’s how you can start earning extra money from your investments through share lending:

• Choose an investment platform. Not all platforms offer the option to lend out your shares, only some of the best trading apps offer it, so check if this feature is available.
• Research the terms and fees. Each platform will have a unique set up for any share lending program. Make sure you check the terms, fees and how any profit is paid out.
• Opt in to share lending. You’ll usually have to give permission for your shares to be lent out, often in the form of a simple tick box somewhere in your trading app settings.
• Sit back and relax. Once you’ve got the ball rolling, there’s nothing else for you to do. Your platform will lend out any eligible shares and you can watch your profit accumulate until you decide to stop lending your stock.

Can you make money with securities lending?

Definitely, but it’s not without its potential downsides and risks too. Also, how much money you can make from lending out your stocks and shares will depend partly on the platform you’re using and the shares you own. Each platform has individual arrangements and fee structures for how you get paid for securities lending.

The amount of money you can earn will also be based on how many shares you hold (and lend out). Another factor that can also impact how much you make is how much demand there is for that stock (and the level of market liquidity).

Keep in mind, share lending is a useful tool to provide some additional income from your portfolio but it’s not a get-rich-quick scheme, you won’t become an overnight millionaire. But, you can build up a decent trickle of passive income.

UK platforms that offer share lending

Here are some of the major investing platforms operating in the UK where you can create an account and lend out your stocks:

Freetrade

A recent addition to the Freetrade platform, its share lending feature means you can keep 50% of any money made by lending out your shares (Freetrade keeps the other 50%).

You’ll lose your share voting rights while they’re leant out, but Freetrade guarantees to replace your shares in the event the borrower can’t return them and the collateral provided isn’t enough to replace your shares. The feature is only available with the general investment account (GIA) and self-invested personal pension (SIPP).

Robinhood

Another new feature, Robinhood’s stock lending feature means that Robinhood themselves borrow your shares (to help with trade settlements, to lend out, or to use as collateral for other loans).

You need to have an account worth at least £5,000, at least £25,000 in reported income and some investing experience to qualify. Robinhood only offers US stocks and you’ll also lose voting rights. Robinhood states you’ll get 15% of any earned income (which apparently equals a 50/50 split once its costs are taken care of, which seems a bit odd considering Robinhood are the ones borrowing your shares).

Trading 212

The platform has offered this feature for a while, leading the pack. All shares lent out are secured with US treasuries and bonds, and similar to other platforms, Trading 212 splits any lending profit with you on a 50/50 basis.

Like other platforms, you’ll also lose any share voting rights. Share lending is only possible with your Invest account (general investment account). You can turn off share lending on Trading 212 any time you like by heading back to the “Interest on shares” tab and then clicking “Disable lending” and it can take 2 days to stop lending your shares on Trading 212.

Revolut

For Revolut’s optional stock lending service, you’ll get 15% of any income, then 20% goes to Revolut, and the remaining 65% to DriveWealth (Revolut’s third party broker). To lend out stocks on Revolut, head to the “Invest” tab on the bottom menu, click “More” and then tap “Stock lending”.

You can disable the Revolut share lending feature by following those same steps and then tapping “Disable stock lending”. When you first go through this process, you’ll have to answer a few questions to help determine your eligibility.

It’s best to check the terms of each share lending program to find the right one to use. Also, remember that you need to be happy to buy shares and hold your stock portfolio on one of these platforms to lend them out in the first place. So take some time to compare platforms and find the best trading app to build and keep your portfolio.

What are the risks of securities lending?

Although this can be an interesting method to try and squeeze more income from your investment portfolio, there are some important risks and drawbacks to consider:

• Loss of voting rights. In most cases, lending out your shares means that you’ll temporarily forfeit any voting rights for that company (but this may not be something you use anyway).
• Counterparty risk (borrower default). This just means there’s a chance that the company or person borrowing your shares can’t return them. However, most platforms protect against this by making borrowers use collateral. And in some cases, like with Freetrade, platforms will guarantee your stocks or use insurance to make sure you get everything back.
• Stock price changes. Your stocks and shares might drop in value and any lending income may not cover your losses (but this would happen even if you didn’t lend the shares out).
• Relatively small rewards. Because you usually only get to keep a portion of the income and profit made, sometimes the interest you’re paid is so small that it may not be worth the hassle.

What’s the best platform for share lending in the UK?

Finder expert George Sweeney answers

It’s hard to say definitively because each comes with its own benefits and drawbacks. Freetrade and Trading 212 are possibly the best options due to the range of investments available on the platforms, and you get 50% of any income. Robinhood and Revolut only pay out 15% and both platforms are limited when it comes to investment choice (US stocks only).

Seeing as you’re going to be lending out shares from your main portfolio, it’s better to think about which investment platform suits you best, rather than which has the best stock lending feature. Finding the right platform to suit your investing goals is much more important and you should think of this feature as an added bonus rather than a deal-breaker.

Pros and cons of share lending

Like anything to do with investing, securities lending comes with some unique benefits and risks you should weigh up first. Here’s a quick summary of the main upsides and drawbacks to think about when lending your stocks and shares:

Bottom line: is share lending worth it?

Share lending is a relatively simple way to earn extra passive income from your investment portfolio. It wasn’t always straightforward, but advancements in technology and trading apps mean that you can lend out your stocks with just a few taps in some cases.

While it won’t make you an overnight millionaire, it’s another possible wealth-building strategy to explore. Although it’s relatively low-risk, there are still some downsides to consider, so make sure you fully understand how it works before you jump in.

Frequently asked questions

• How long does it take to stop share lending?

  With most platforms (Freetrade and Trading 212, for example) it can take 2 days before your shares will stop being lent out and are completely returned to you.

• Can you lend shares from a stocks and shares ISA?

  In most cases, no. Regulations set by HMRC prevents people from being able to lend out investments for profit that are held in a stocks and shares ISA wrapper.

• How are dividends taxed with securities lending?

  Typically, you’ll receive dividends as normal, but in some cases, you might get what’s called a “manufactured dividend” (Freetrade does this) which can impact tax returns in some countries.

• What's the difference between repo versus securities lending?

  Securities lending and a repo (repurchase agreement) share a lot of similarities. A key difference with repo vs securities lending is that the repo market mostly uses fixed-income assets like bonds as collateral, whereas securities lending focuses more on equities (stocks and shares).

  Also, the repo market is popular for those needing to borrow and lend cash. Whereas with securities lending, borrowers want the stocks and shares themselves, perhaps for activities like short selling.

• How do fund investors benefit from securities lending?

  In the same way as those holding individual stocks and shares. If you invest in a fund that permits securities lending, the fund can generate additional income through the fees it charges borrowers and this can help improve returns or offset the fund management costs.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.