The stock market is at an all-time high, trading fees are at an all-time low and brokerage firms are offering everyday investors institutional quality services. What’s the catch? The catch is that most people are unaware of the full range of opportunities they have in this unprecedented environment. The shift to $0 commissions is an obvious benefit to people who were paying $4.95 per trade. It is clear that large brokerage firms will need to offer higher quality services to replace their lost commission revenue and better compete with modern technology enabled financial firms. What’s less apparent is how everyday investors can capitalize on these institutional services to improve the performance of their portfolios.

In addition to free trading, another service brokerage firms are offering more broadly is Fully Paid Stock Lending. “Fully Paid” means that the investor has bought and paid for the stock using cash – not a margin loan. “Stock Lending” is a transaction where the owner of a stock lends it to another investor for a period of time and is compensated at a stated interest rate. Historically, brokerage firms required you to have at least 100 shares of a particular stock to participate in their programs. As a result, stock lending was only available to institutions, professional investors and ultra-high net worth individuals who used it to generate additional wealth from the massive amounts of stocks they already owned. Today, however, many stock lending programs will allow you to participate with as little as 1 share.

Given the vast improvements in financial technology and the desire of brokerage firms to grow ancillary revenue streams, fully paid stock lending is more accessible than ever for the everyday investor. Most brokerage firms will even pay you a share of their stock lending revenues for participating in their programs. Why? Because they earn money by lending stocks to other investors. If you enroll and let them lend your stocks they will share a cut of the revenue with you. It’s a win-win!

Enrolling in a stock loan program can be as easy as checking a box and clicking “I agree”. The brokerage firm will handle all of the transactions and ensure that your share of the revenue is deposited into your account. Additionally, as the lender you are not locked into a loan term. You can elect to sell your stock at any time and the brokerage firm will “recall” (i.e. cancel) the loan for you. The amount you can earn from lending your shares will depend on the demand to borrow that stock and the amount of time it has been loaned out.

Stock Lending isn’t some get rich quick scheme, but it can provide additional income depending on the amount and type of shares you own. For some people that may translate into a few extra pennies in their account each month. For others it may be a few extra dollars or even a few hundred dollars each month. While the revenue you earn may seem small relative to the value of your portfolio, when you are saving for retirement or college pennies can add up over time. If your portfolio’s “day job” is to generate returns through the increase in value of the underlying stocks; Stock Lending is more of a “side hustle”.

To better understand how it works let’s look at an example using one of the most loaned stocks in the world, Tesla (TSLA). On November 21st, 2019 Tesla unveiled their highly anticipated fully electric pickup dubbed “Cyber Truck”. While nearly everyone agreed that the price and performance of the vehicle were phenomenal, the cold, angular and futuristic look of the truck was polarizing to say the least. Twitter erupted! Countless people, including my wife, proclaimed the death of company arguing that they had completely missed the mark and that no self-respecting person would ever drive a vehicle that hideous. Before she could complete her proclamation, I and 146,000 like-minded individuals had already placed a pre-order for a Cyber Truck.

Similarly, markets are polarized on the future of Tesla stock. Some investors believe the stock will rise while others are betting the company will go bankrupt. The investors that are actively betting against the company do so by “shorting” the stock. “Shorting” means that the investor is paying to borrow the stock, selling it at the current price, buying it back at a future price (hopefully a lower one) and then returning it to the lender. Short sellers are betting that the stock price will go down and that they will make money in the process. Stock lending makes it possible for short sellers to execute their investment strategy and as a result, investors who lend stocks are compensated.

As technology continues to democratize the financial services industry there will be countless opportunities for everyday investors to capitalize on services that were previously reserved for institutional investors. Undoubtedly, Free Trading and Stock Lending are two of those services. Everyday investors who are looking to lower costs and increase income from their portfolio should contact their brokerage firm and inquire about how they can give their portfolio a side hustle.

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Disclosures: Enrolling in a stock lending program does not guarantee that your shares will be loaned out. Loaning out your shares allows short sellers to bet against your stock and may put downward pressure on the stock price. If the stock you lend pays a dividend while it is on loan the income you receive is taxed at ordinary income tax rates instead of capital gains tax rates. To know exactly how it will impact your situation consult your tax advisor. Stocks that are on loan may not be protected by the Securities Investor Protection Corporation (SIPC). When your shares are on loan you are not able to vote proxies on corporate decisions like executive compensation, board elections, mergers, acquisitions, spin-offs or stock splits. This is not considered investment advice.
Courtney Leffall

Courtney Leffall

Courtney Leffall, CFP® is a Sr. Technical Product Manager with Apex.