The practice of securities lending is a well-established one that has been around almost as long as stock markets have. It’s commonly practiced by traders and lenders of all shapes and sizes and plays an essential role in the functioning of the global economy.
If you want to know what is securities lending, the practice works relatively simply. Say a trader is convinced that the stock of a certain company is going to drop in value. They can simply ask a securities lending program to loan them the stock for them to sell.
Once the price does drop, the trader can buy it at a lower price, then wait for the price to rise again before selling it back to the brokerage. The profit is made by the trader pocketing the difference in share price.
To participate in securities lending and borrowing, you need a securities lending program you can trust. They should facilitate exchanges quickly and efficiently. Here are the most important things to keep in mind when choosing a securities lending program.
Can Your Securities Lending Program Lend To You?
Stock lending is governed by a vast and diverse regulatory network that differs from country to country. In order to be an eligible borrower, you’ll need to make sure you can legally operate with a program in accordance with their own terms and conditions.
Local rules and regulation in the country you wish to operate in will dictate your eligibility to a large extent. Different programs also request that a potential borrower is able to prove their eligibility.
This means you’ll typically need to be able to provide tax records, assets, and evidence of your previous trading history.
Check the Program’s Reputation
When it comes to securities lending transactions, it’s vital to choose a securities lending program with a solid reputation. There are endless horror stories out there of certain lenders having no capital of their own. This means they won’t be able to help you out if a loan deal goes sour.
Some also charge interest rates as high as 10%. You also need to make sure that your lender doesn’t have any history of possible securities fraud. Choosing them could also make you liable for criminal activity.
You’ll want to choose a program that is 100% transparent. One that doesn’t try to trick potential borrowers with false information about the stock market. Lastly, it’s important to make sure the program is well-funded with plenty of capital at hand.
Know Your Terms
Different securities lending programs offer different terms. Therefore, you’ll want to pick terms that are most favorable to you and the kind of trade you wish to conduct.
Find out how much you’re able to borrow and when, as well as the terms for payment and collateral. Once you have this knowledge, you’ll be able to choose the right program for you.
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