Clear your confusion on Stock Lending and Borrowing mechanisms right here.
As an investor, would you not like to have extra income on your holdings? The stock lending and borrowing mechanism, or SLBM, could be your answer. In this procedure, you can lend your securities to traders for some fee. Such lending is helpful for investors who wish to short-sell the securities that you have. However, the procedure needs a prior agreement between the borrower and the lender.
What should you know about it?
There are certain things to know about stock lending and borrowing which can help you understand the procedure better.
- The SEBI in India regulates such operations.
- SLB also helps to offer liquidity to the market.
- Every transaction of SLB has a definite tenure and a rate of interest.
Why should traders borrow and lend their stocks?
There are certain advantages that SLB in a stock market offer to both the borrower and lender. So whether you lend or borrow one, the perks will not disappoint you.
You can enjoy extra money by lending your stocks from the portfolio when you are the lender.
And as a borrower, you can take the stocks for various purposes, such as short sell, arbitrage, or simply to manage physical delivery.
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What are the Advantages of SLBM?
There are many investors who were not even aware of SLBM’s full form, let alone reaping its benefits. But with its popularity, many investors are showing interest in trying it. As an investor, you enjoy some benefits that few investment options deliver. Get all the advantages like:
- Extra income: If you manage to churn out a few rupees more from an idle portfolio, should you not do that?
- Selling it short: Looking at the stocks in their bearish avatar is possible. And when this happens, short-selling the stock could be the safest bet that you can make.
- No risk for counterparties: The securities that you lend, as well as the transactions that you do for borrowing security, have the guarantee of National Securities Clearing Corporation Limited. With NSCCL as the financial guarantor, you hardly have a reason to frown about keeping your money safe.
- No physical settlement: You can simply borrow stocks from SLB and let go of any physical settlement.
What are the mechanisms involved with stock lending and borrowing?
The stock lending and borrowing mechanism is as simple as it can be. This is how it goes:
- As a lender, you can place your order with a participant. Mention the stock as the quantity that you wish to lend, your preferred tenure, as well as the fee that you expect. Ensure to quit the lending fee on the basis of shares.
- A party interested in borrowing your stock would convey his preferred tenure and time and the maximum fee that he agrees to pay.
- The procedure of matching the lending fees goes on in the way trading on exchanges goes on.
- The lender needs to pay some percentage of the actual amount of stock that he lends. This assures that the lender does not back off after agreeing to lend. However, the margin money gets a refund after his stock leaves the demat account after lending.
- A borrower can effectively sell the stock. But he needs to buy it back when participating in transcription.
- The daily market-to-market on-margin money checks that the borrower does not fall prey to any default risk.
- When the contract ends, as a lender, you get the stock back and also receive the margin money.
What should be the rate of interest for borrowing and lending?
There is no fixed rate of interest in the securities that you lend or borrow in SLB. It can depend on one stock to the other. This rate can also vary on the basis of the condition of the market, as well as the borrowed time.
How stock lending helps the lender?
There is a reason why long-term investors, like mutual funds and insurance companies, invest very frequently in SLB. Their prime reason is, of course, the relatively less risk that it offers over future contracts and options.
So if you wish to borrow stock from any of these sectors, you will have many choices to select from; apart from that, you enjoy an increasing return even from an idle portfolio.
Say that you have about 1000 shares from a leading company and plan to keep them with you for a long period. While holding on to the stocks, you can consider lending a few of them for a limited period of time. See how it shows some lovable results on your demat account, especially when the demands of such stocks are high.
Why should a borrower get your stock?
A borrower views your stock as a commodity of short-term sale. Having a negative view of the stock price can be a favourable time to share lending and borrowing, sell them and repurchase with a price fall.
The borrower gets his share of the profit after deducting the buying price from the selling price and after deducting other costs like the interest from there.
Which stocks should you lend in SLB?
For SLBM, any security that offers derivatives is ideal for lending.
What Are Rollover, Recall And Repay Options?
The world of SLB is full of technical jargon. So much so that not all novice traders understand it fully. For the uninitiated, some of them are:
- Rollover: This is one option where a client can shift or roll over his position in the present month to that of the next month.
- Recall: in this option, a client gets the ability to recall his share before the contract ends.
- Repay: borrowers can go for this option to repay their share before the contract expires.
Is there any maximum and minimum tenure for the contract SEBI?
The SEBI instructs that any borrower can keep the stocks for no more than 12 months. The minimum time of the contract is 1 month.
The Final Word
No options for funding in the world of share trade are without any risk. Even Stock Lending and Borrowing is no exception to the rule. However, despite the volatile market, thousands of investors are managing to earn satisfactorily by lending stocks that sit idle with them.
Would you not like to follow their suit? Those who know how to make this right are all praises of SLB. Let this be your motivation to take a plunge.
And with many experts all willing and set to offer you their expertise in this option, there is no reason why you would not ace this money-making mechanism.