How markets work
Securities lending
Lending out shares you own, for a fee, usually to someone who wants to sell them short.
How it works
Funds and brokers lend the securities they hold to earn additional income. The borrower posts collateral and pays a fee, and the lender keeps economic ownership including dividends.
For a fund, lending revenue can offset a meaningful part of the expense ratio. Whether it is passed to investors or kept by the manager varies and is disclosed in the fund documents.
Where it misleads people
Lending introduces counterparty risk and, in most arrangements, suspends your voting rights on the loaned shares. Both are usually small and neither is zero.
Related terms
- Short sellingBorrowing a security, selling it, and hoping to buy it back cheaper before returning it.
- Expense ratioThe annual percentage of your money a fund takes to cover its running costs.
- Counterparty riskThe risk that the other side of a contract fails to do what it promised.
- Proxy voteVoting on company resolutions without attending the meeting in person.
Mentioned in
More in How markets work
- Settlement
- Payment for order flow
- Short interest
- Order book
- Nominee account
- Short squeeze
- Market maker
- Slippage
All 33 How markets work terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.