Stock lending. Google it and there are endless resources, threads and videos on it. We ourselves have numerous resources on the topic (A to Z here, info on our program here and some more here). Some articles out there say it’s risky. Some say it’s not. Comments in social threads call out they didn’t make enough and not to bother. 

But, like comparing what you learned in school to doing an actual job, reading can’t fully replace seeing something in action. Having seen stock lending in action for a little while now, here are some things I learned from behind the scenes.

1. It hasn’t been that risky over time. Generally speaking, you are letting a broker borrow shares that would otherwise be held to lend out in exchange for payments. This naturally leads to asking: what happens if the borrower of my shares goes bankrupt?  Well, instead of SIPC insurance stepping in, cash collateral is used to protect loaned stocks. This means that Robinhood, as a facilitator of the loan, sends cash equal to a minimum of 100% of the value of your loaned stocks to a third-party bank, in case it’s needed. In the unlikely event that Robinhood goes bankrupt and couldn’t return the shares to you, this third party bank would pay you the value of your loaned securities in cash. The risk is mitigated by the collateral held separately, elsewhere. The 2nd question might be: how many times has it actually happened that the collateral needed to be used in this case? Since the Robinhood stock lending team started working together in 1998, at previous firms, they have seen only three borrowers with active loans default. In each case, the team saw either the shares get returned anyway, or was able to repurchase every security out on loan with collateral on hand and without any losses to clients.

2. You usually get your regular, qualified dividends paid to you.  One knock on stock lending is that the dividends paid come in a form that is less tax efficient: cash-in-lieu, or aka, manufactured dividend. So it’s true that manufactured dividends are taxed at ordinary income rates that are higher than regular, qualified dividend tax rates (similar to long term capital gains tax rates). To mitigate the impact of these payments, in most cases, Robinhood will attempt to return your shares prior to any dividend record date. Meaning, in most cases, you’ll still get a regular qualified dividend. (But it’s always a good idea to consult with a tax professional regarding your specific situation.) In fact, I looked back over the last two plus years and saw that only 0.3% of the dividends on average were paid out in the manufactured form. Said another way, more than 99% of the time, Robinhood called loaned shares back to ensure dividend payments were made, rather than the less tax efficient form of manufactured dividends. 

3. You may earn something but how much depends on time and demand.  a) First, it takes time for securities to be lent out once you enable it and agree to the terms. That’s because the processes that work in the background aim to line up ownership to requests. When we looked back through our own data, we saw that if someone owned shares that were in demand to be borrowed, it took about two weeks, on average, to get close to earning something, where at least 30 days of holding an in-demand security improved that further. b) As for demand, this is directly correlated with the lending rate. Securities in short supply or in great demand to be borrowed tend to have a higher lending rate. The lending rate could also fluctuate over time, based on the volume of short selling, hedging interest, and general market conditions. General market conditions include whether it’s a bull or bear market and the level of interest rates. Of course, there is never a guarantee stocks will be lent out. In fact, from June 2022 to April 2024, our customers earned a total of over $10M through Stock Lending.  But a lot more was left on the table.  In 2023 alone, if all customers that held in-demand stock, meaning they could have earned something, had signed up for stock lending, customers, in aggregate, could have earned about $45MM more than was paid out in SLIP accruals in that year (assuming the same lending rates). 

The thing is, most of the time, when you are investing in ETFs, or funds, for example, stock lending is going on inside the fund. Participating in it is an opportunity to earn more, while you invest.