We’re considering taking the next step to make our unique zero-commission, zero-fee investing service even more sustainable.
A fairly common practice amongst brokers is to lend out the securities of their clients to other market participants who’d like to borrow them for short selling. For the clients lending the shares, the benefits may be slim to none, due to the extremely low borrow rates, but for the broker holding the bulk of shares, the pennies add up & can make the difference between losing money or being profitable.
We’ll be going down the same path with the help of Interactive Brokers, the world’s largest broker by the number of trades.
It’s crucial to point out that this will not affect your holdings in any way, shape, or form. Even if your shares happen to be lent out, which you will never notice as this is a 100% backend process, you will still be able to close, modify, add to the position.
This is because Interactive Brokers always hold a large enough pool of shares so that even during the most critical of times, they can always give you back your lent out shares, should you wish to close a position. That’s also why you won’t see them disappear, even if they’ve been lent out - you always have full access to them. The holdings cannot be lost, misplaced, or affected in any other negative way. In fact, most shares don’t even end up being lent out in the first place.
If you’re curious as to how the process actually works, let’s look at an example:
TSLA stock currently trades at $810 & due to whatever reason, you think the company is overvalued & decide to short it, betting that the stock would fall. Shorting means borrowing the stock from someone who owns it (John Doe) & selling it to the open market for $810. However, that $810 is not pure profit because you still need to give John Doe his share back at some point. Now, let’s consider that one week later, a single TSLA share has depreciated to $700. You’re happy with the $110 difference (profit) & decide to close the short position. So, you’d need to buy back 1 share at $700 from the open market & give it back to John Doe. Once that’s done, you pocket the $110 difference.
If you’d like to learn more about securities lending, feel free to check out these sources: