In order to discern when an investment is good for each particular investor, they need to learn what a securities lending definition is. When people speak of securities lending, they are discussing stocks; one person will lend another securities or stocks and in exchange for this loan, the borrower offers the lender something as collateral. Acceptable forms of collateral for securities based lending are cash, government securities or a letter of credit. The letter of credit must be of at least the value of the securities that are being lent to the borrower but can also be of greater value.
How Do People Earn Money from Securities Lending?
One purpose of secured lending services is for a securities broker or a dealer to earn a finance charge on their securities. The other way that a lender can benefit from loaning their securities to others is in the event that the borrower can’t repay the loan; in these cases, the lenders will take possession of the borrower’s collateral. The borrower will, typically, be another brokerage firm or an investor who will retain the title to the security in this deal.
Another reason people seek to obtain these loans is when they are involved in short selling. Short selling means that after the borrowers receive the loaned securities, they will immediately sell them in order to purchase them again at a lower price. In order for this strategy to work, these borrowers must believe that the particular securities they are borrowing are about to decrease in value. The lender gains by receiving the dividends that these securities earn.
The types of institutions that engage in securities based lending must have securities of significant value in order to make this strategy worthwhile to them.
Who Offers Secured Lending Services?
The financial enterprises who offer secured lending services, are generally those that deal in mutual funds, insurance companies, institutions that run pension funds and endowments and those who provide donations given to institutions such as universities, museums or hospitals.
When people engage in secured lending services, it will be a legal transaction requiring that the parties sign an agreement. Everything pertaining to the deal will be written out in this agreement including:
- The term of the loan,
- The fees charged by the lender,
- The value of the collateral and
- The type of collateral that secures the loan.
Plenty of opportunities for people to engage in predatory lending practices exist in this arena. What lenders have been known to do is deceive their borrowers into believing that they will owe less than they actually do. When the truth is revealed and the borrowers discover how much they owe the lenders, they may default and the lenders take possession of the property. In this instance, people will need to retain the services of a good securities lawyer.
Loaning securities can be lucrative for people who can lend them in such large amounts that what they receive in dividends or interest payments makes the deal a positive one for them. Borrowers who engage in short selling, for example, also benefit from these sales. They aren’t, generally, the type of investment that small investors step into, but those who can find this type of lending to be highly advantageous.
Summary: In the loaning of securities, brokerage firms participate on both sides; one side does the lending while the other side, a lot of the time, will obtain these loans to engage in short selling. But, the practice of securities lending has the potential to be the cause of predatory lending lawsuits.