how does lending stocks work — complete guide

Stock lending (Securities lending)

how does lending stocks work is a common question from investors and advisors. In brief, securities or stock lending is a market practice where owners of fully paid shares, ETFs or bonds make those holdings available to borrowers (often through their broker or a custodian) in exchange for a fee or revenue share. This article explains the purpose of stock lending, the main participants, step-by-step mechanics, collateral and risk controls, tax and accounting considerations, and practical guidance for retail investors who are considering enrolling in broker lending programs.

Overview and historical context

Securities lending has existed for decades as an institutional market activity. Large custodians and pension funds historically lent securities to hedge funds and broker-dealers to support short selling, settlement needs and market making. Over time, securities lending grew into a sizable securities finance industry that helps maintain liquidity and efficient price discovery.

Retail participation expanded more recently as online brokers introduced programs that allow fully paid retail shares to be lent through agency arrangements. Those retail programs opened up a new source of lendable inventory while offering investors a portion of lending revenue in exchange for giving brokers the right to lend shares under specified terms.

Why securities are borrowed

Borrowers take securities on loan for several principal reasons:

• Short selling: To borrow shares to sell short and profit if the price falls. Short sellers must borrow before they short (or arrange to borrow) and return the shares later.
• Settlement and fail cover: Brokers sometimes need shares to meet settlement obligations when trades otherwise would fail.
• Collateral and financing: Borrowed securities can be used as collateral for derivatives or financing transactions.
• Market making and liquidity provision: Market makers borrow to facilitate immediate customer orders and to provide two-way liquidity.
• Corporate action or voting strategies: In complex cases borrowers may manage positions around dividends, spin-offs or vote-driven strategies.

Key participants

• Lenders: Retail investors (via broker programs) and institutional holders (mutual funds, pensions, endowments, custodial clients).
• Borrowers: Hedge funds, broker-dealers, proprietary trading desks and market makers.
• Intermediaries/agents: Custodians, prime brokers and brokers acting as lending agents who arrange loans, manage collateral and handle recalls.
• Clearing houses: Clearing organizations and central counterparties help settle trades and reduce counterparty settlement risk.

Types and models of securities lending

Fully‑paid (retail) lending programs

Fully‑paid lending programs allow brokers to lend shares held in retail accounts where the owner has paid in full for the securities. Retail clients typically must opt in to the program. Under agency models (described below), legal ownership stays with the client while the broker acts as agent to arrange loans and handle collateral and payments. Retail lenders receive a share of the revenue generated by the loan, with the broker retaining a portion.

Agency lending vs. principal lending

• Agency lending: The broker or custodian acts as agent to match borrowers and lenders. Shares remain client-owned on the broker's books, and the agent arranges collateral and revenue sharing. Agency models are common for retail and institutional clients who want to keep ownership and a transparent revenue split.
• Principal lending: The broker lends from its own inventory or balance sheet (principal position). This model exposes borrowers and the broker to the broker's own credit and inventory policies. Principal lending can be faster but carries different counterparty implications.

Institutional lending (programs used by funds and custodians)

Institutional programs often include pooled lending (multiple funds pooled into a lending pool), dedicated fund-level programs, and bespoke mandates where custodians lend to approved borrowers under strict collateral and reinvestment rules. Institutional programs typically have detailed reporting, risk limits, and negotiated revenue splits.

How the lending process works (step-by-step)

how does lending stocks work — the process is fairly standardized across markets, with some variations by broker and jurisdiction:

1. Enrollment/opt-in: A retail or institutional owner consents to a lending program and sets any exclusions (securities that should not be lent).
2. Match with borrower: A borrower requests a borrow of specific securities. The lending agent matches the request with available supply and loan terms.
3. Transfer of securities: Legal title or control (depending on model) is transferred to the borrower for the loan term while documentation is established.
4. Collateral posting: Borrowers post collateral — usually cash or high‑quality government securities — with a haircut to protect the lender against price moves.
5. Daily mark‑to‑market: Collateral and loan value are marked to market daily. If collateral falls below required levels, borrowers must top up; if collateral is excess, it may be returned.
6. Fee accrual: The borrower pays a borrowing fee (often expressed as an annualized rate), and that fee is split between the lender and the lending agent per the program agreement.
7. Recall and termination: The lender (or lending agent) can recall the securities, or the borrower returns them on agreed terms. Recalls allow lenders to regain the shares (e.g., to vote or sell).
8. Return of securities: On termination, the borrower returns the securities and receives back collateral adjusted for market movement and any accrued fees.

Collateral and risk mitigation

Collateral is the primary protection for lenders. Typical features include:

• Acceptable collateral: Cash, Treasury or other government securities are common; some programs accept high‑quality corporate bonds or equivalents.
• Haircuts: Collateral is posted above the loan value (e.g., 102%–105% for cash collateral against equities) to cover price risk.
• Daily mark‑to‑market: To limit exposure, collateral and loan value are revalued daily with margin maintenance.
• Substitution and rehypothecation: Agents may allow collateral substitution; cash collateral is often reinvested by the agent under agreed policies, which introduces reinvestment risk. Some programs allow rehypothecation of collateral, which should be disclosed.
• Counterparty limits and approved borrower lists: Institutional lenders and agents impose borrower exposure caps and pre‑approve counterparties.

Payments, fees and revenue sharing

Borrowing fees (expressed as an annualized rate) vary with demand. Hard‑to‑borrow or “special” securities (those with high short interest and low supply) command higher fees. Typical mechanics:

• Borrow fee: The borrower pays a periodic fee; for cash collateral loans the fee may be structured as a rebate to the borrower or as an explicit rate to the lender.
• Revenue split: Retail programs usually split revenue between broker and client (examples vary: some brokers pay a fixed percentage of gross fees, others a negotiated split). Institutional mandates are negotiated case‑by‑case.
• Rebate model: In some markets, especially for cash collateral, a portion of the short rebate is returned to the borrower and the lender receives the net interest or negotiated share.

Factors affecting returns: supply/demand for borrow, short interest, market volatility, and broker pricing practices.

Economic ownership, rights and corporate events

Lenders generally retain economic exposure to price movements of the lent security: they gain if price rises and lose if price falls. However, while shares are on loan the lender often temporarily loses beneficial voting rights. For cash dividends, borrowers are required to make “manufactured payments” (cash-in-lieu) to the lender to replicate the dividend amount. Manufactured payments can have different tax character and reporting treatment than qualified dividends; see the Tax section below.

Tax and accounting considerations

Tax treatment varies by jurisdiction and specific circumstances. Common points:

• Dividends vs. manufactured payments: Manufactured payments received while a security is on loan may be treated as ordinary income rather than qualified dividends in some jurisdictions.
• Reporting: Brokers typically provide end‑of‑year tax statements that reflect lending income, manufactured payments, and gross proceeds. Investors should consult tax advisors for personalized treatment.
• Accounting: Lenders must follow applicable accounting rules for securities on loan; institutional investors may net loaned positions or disclose them per regulatory rules.

Risks for lenders

Lenders should understand the core risks before participating:

• Counterparty/default risk: If a borrower defaults, the lender relies on collateral and legal remedies to recover value.
• Collateral shortfall and valuation risk: Poor collateral valuation or illiquid collateral can create recovery gaps.
• Operational risk: Failures to recall, errors in settlement, or documentation gaps can harm lenders.
• Loss of voting rights: Shareholders typically cannot vote lent securities while on loan.
• Tax risk: Manufactured payments may be taxed differently from qualified dividends.
• Liquidity risk in stress: In market stress, borrowers may be unable to provide top‑ups, and recalls may be delayed, constraining the lender's ability to sell.
• Model differences: Principal lending exposes the lender to the broker’s balance‑sheet practices; agency lending offers more separation but still has counterparty exposure to the agent for operational performance.

How lending rates are determined

Lending rates are a function of supply and demand in the borrow market:

• Availability: Abundant lendable supply pushes fees down; scarce supply pushes fees up.
• Short interest: High short interest relative to supply increases demand and fees.
• Volatility and news: High volatility or event‑driven demand (earnings, M&A) can raise borrow costs.
• “Specialness” or hard‑to‑borrow premiums: Illiquid securities or those with concentrated ownership can trade at significantly higher rates.
• Broker rebates and platform mechanics: Different platforms handle cash collateral, rebates and reinvestment differently, affecting net returns to lenders.

As of Jan 12, 2026, according to Barchart, market headlines and regulatory proposals can drive sudden demand and price action in individual stocks; for example, Visa shares fell 4.7% in morning trading the same day after linked political and regulatory news. Shifts like this can affect borrow demand and short interest around large payment-network stocks and other high-profile names.

Regulatory and investor‑protection frameworks

Regulatory oversight varies by jurisdiction. Common protections and rules include:

• Disclosure and client consent: Brokers must disclose lending terms and obtain client consent for retail lending programs.
• Custody and segregation rules: Custodians and settlement systems have rules to protect client assets and ensure accurate recordkeeping.
• Capital and reporting requirements: For principal lenders and large intermediaries, regulators impose capital and reporting rules to reduce systemic risk.
• Example authorities: In Canada, CIRO (Canadian Investment Regulatory Organization) provides guidance; in the U.S., broker‑dealer rules, SIPC protections and securities law frameworks apply; institutional lenders follow custodian and fund regulations. Clients should review broker‑specific disclosures for details.

Broker programs and retail participation (examples)

Different brokers implement securities lending in distinct ways. The following summarizes typical program features drawn from public broker documentation:

Robinhood

Robinhood has offered an opt‑in stock lending program for eligible retail accounts where customers can earn a share of lending revenue. The program requires consent, allows some exclusions, and operates under an agency model in many cases.

Fidelity

Fidelity’s fully‑paid lending programs are typically offered to margin‑eligible and certain retail accounts; Fidelity emphasizes institutional custody practices and detailed disclosures for reinvestment and collateral.

Vanguard

Vanguard operates securities lending programs for certain funds and custodial services; Vanguard’s institutional approach focuses on conservative collateral investment and client reporting.

Wealthsimple and TD

Wealthsimple and TD offer retail lending programs with opt‑in mechanics and variable revenue share. Brokers differ in how they treat cash collateral, reinvestment, and client fees.

Note: Program terms (revenue split, reinvestment policy, collateral types, and the right to recall) vary by broker and by jurisdiction. Always read the broker’s lending agreement and disclosure documents before enrolling. If you use Web3 wallets or interact with crypto custody, consider Bitget Wallet for secure custody services and Bitget for on‑ramp trading and custody features.

Market impact and role

Securities lending supports market liquidity, helps maintain continuous trading by enabling short selling, and can improve price discovery. By facilitating borrowing and settlement, the securities finance market can reduce transaction costs and enable hedging strategies. At the same time, concentrated borrowing and rehypothecation practices can raise systemic concerns if not managed with adequate collateral, transparency and regulation.

How to participate — practical guidance

If you’re a retail investor considering a securities lending program, follow these steps:

1. Check eligibility: Confirm your account type and whether your broker offers a program.
2. Read disclosures: Review the lending agreement, collateral policy, and revenue‑share terms.
3. Set exclusions: Exclude securities you don’t want lent (major holdings, index‑tracking ETFs you rely on for voting, or hard‑to‑value assets).
4. Monitor loans: Track which shares have been lent, fee earnings, and recall notices.
5. Understand recall mechanics: Know how quickly your broker can return lent shares if you need to sell or vote.
6. Assess tax implications: Ask a tax professional about manufactured payments and any differences from standard dividend tax treatment.
7. Ask the right questions: What collateral is accepted? Are cash collateral reinvested? What is the revenue split? What is the recall timeline?

Common myths and FAQs

• Do I lose my shares? You retain economic exposure (price moves) but may lose voting rights while shares are on loan.
• Can my broker default? Brokers can face financial distress. Collateral and custody arrangements mitigate this, but counterparty risk remains.
• Will I be taxed differently? Manufactured payments can have different tax treatment; consult a tax advisor.
• Can I still sell my shares? Typically yes, subject to recall mechanics; inform your broker if you need immediate access.

Example calculations

Example 1 — Simple fee accrual:

• Loan value: $10,000 worth of shares
• Annual borrow rate charged to the borrower: 5% (0.05)
• Lender’s revenue share: 50% of gross fees

Daily accrual = (Loan value) × (annual rate) / 365 = 10,000 × 0.05 / 365 = $1.37 per day gross

Lender share (50%) = $0.69 per day, or about $21.00 per month.

Example 2 — Collateral and haircut:

• Borrower posts cash collateral for $10,000 loan with a 102% collateral requirement
• Collateral required = $10,000 × 1.02 = $10,200

If collateral is reinvested by the agent, reinvestment returns minus fees determine the net economics for the lending agent and the lender.

Best practices and risk mitigation for lenders

• Read the agreement carefully: Understand revenue splits, collateral reinvestment, and rehypothecation clauses.
• Use exclusions: Prevent lending of core holdings or securities where you need voting rights.
• Check collateral policy: Favor programs that use high‑quality collateral and conservative haircuts.
• Monitor activity: Review loan reports and tax documents each year.
• Seek professional advice: For large positions or institutional mandates, consult legal and tax professionals.

Glossary

• Borrower: Party that takes securities on loan.
• Lender: Owner of securities who makes them available for lending.
• Agent: Intermediary that arranges loans and handles collateral.
• Collateral: Assets posted by borrower to secure the loan.
• Manufactured payment: Cash payment by a borrower to replicate a dividend when the actual dividend is not received.
• Recall: Request by the lender to have the loaned securities returned.
• Haircut: Percentage by which collateral exceeds the loan value to provide a safety buffer.
• Rebate: In some markets, the interest returned to the borrower after cash collateral reinvestment.
• Hard‑to‑borrow: Securities that are scarce to borrow and command higher fees.
• Mark‑to‑market: Daily revaluation of loan and collateral to maintain margin.

See also

• Short selling
• Margin borrowing
• Custody and custodial services
• Securities finance and repo markets
• ETF mechanics

References and further reading

• Market Realist — "How Does Stock Lending Work? An Explainer"
• Wealthsimple — "Everything you need to know about stock lending"
• CNBC — "What Is Stock Lending And Is It Safe?"
• Robinhood Support — "About Stock Lending"
• CIRO — "Fully-Paid Stock/Securities Lending" guidance
• Fidelity — "Fully-Paid Lending"
• Cache — "Stock Lending 101"
• Vanguard — "Securities Lending Insights: Vanguard's Approach"
• TD Bank — "Understanding stock (or securities) lending"

As of Jan 12, 2026, according to Barchart, political and regulatory headlines affected shares of major payment‑network companies; for example, Visa dipped 4.7% in morning trading that day amid commentary around swipe fees and policy proposals. Readers should note that market headlines can change borrow demand and short interest in affected names.

Further reading: consult your broker’s program documents and seek tax and legal advice for your circumstances.

Next steps: If you want to explore securities lending as a retail investor, check your broker’s program disclosures and consider custody alternatives. For crypto custody or bridging to tokenized securities markets, Bitget Wallet offers secure custody options and Bitget provides regulated trading and custody services tailored to individual and institutional needs. Learn more in your account dashboard or contact support for program specifics.