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Stake lets you lend to short sellers: What are the risks and rewards?


The low-cost trading platform has moved into stock lending, but what does it mean and how will it impact you?

Australian trading platform Stake will launch a new stock lending product, which will allow you to start earning a passive income on your shares.

Kicking off on Wednesday 13 July, US securities investors who opt in and out of "stock lending" will be able to lend their shares and receive a passive income from it.

Stake CEO and founder Matt Leibowitz said his organisation is going to redefine the model to ensure customers get part of the return from stock lending.

"We're excited to be bringing a first-of-its-kind product to retail investors in this country. Stock Lending has historically only been available to hedge funds and institutional investors.

"This product is an opportunity for investors to be in that game and earn passive income on their portfolios, big or small."

How does it work?

Stock lending allows investors with Stake to earn an additional income by lending out their assets to the lending market.

While your US stocks will be eligible, not all shares will be required, depending on borrower demand. But those who are part of the loan will be eligible to receive payment for the assets.

On the other side of the trade (those paying you for the loan) are institutional investors such as stock arbitrageurs, hedge funds and in some instances ETFs who are borrowing your funds and in most instances short-selling them.

This means the borrower will immediately "sell them", (although nothing changes for you) before repurchasing later on.

The borrower is hoping to profit from the selling before "buying it back" at a lower price. As such, the person borrowing your stock is effectively betting against your investment. If it goes down they'll return the stock to you at a lower price.

But if they are wrong, you would receive a passive income as well as have your shares at a higher price.

What do you gain?

In return for lending your stock out, you'll receive a loan payment.

This is your part of the borrowing fee, paid to Stake by those that are borrowing stock. Obviously the more stock you lend, the higher the fee.

According to Stake, they do the heavy lifting, playing the role of middleman between the customer and the borrower, while you can "sit back and get a clip of the ticket".

The bottom line

When you own a share, besides dividend payments there aren't really a lot of ways to earn a passive income.

A product like this will help, allowing you to gain money through loans on shares you own.

The downside is, the people you lend your shares to are effectively betting against you. Bear in mind that short-sellers are not necessarily correct. If you believe in your thesis and think the short-sellers are wrong, this is a way to earn an additional income while owning a share.

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