How can you generate income with Stock Lending?
Fully “paid for” shares can be used to generate income for the stockholder. Read more below about how you can go about starting to earning lending income on stock shares you already own! For this posting, we will be using the WeBull brokerage as a recommended service.
How Does It Work?
Yes… It is really that simple.
Stock Basics Refresher
Quick basic coverage to help with understanding how stock lending for income works.
- Brokers are just the companies that handle most retail investments/trades. Most are fairly well know like TDAmeritrade, Fidelity, Charles Schwab, and some of the newer low cost brokers like Robinhood and WeBull.
In a basic sense, there are two types of brokerage accounts. Cash and Margin. There are other types but for simplicity, we will stick with these two.
“Cash Accounts” – In Cash Accounts, the trader can only buy stocks up to the total amount of cash they actually have in their account. A Cash Account is also required to lend securities for generating income.
“Margin Accounts” – In Margin Accounts, the trader has access to capital beyond their own invested amount. Most brokers offer between 2x and 4x margin leverage. Meaning, if you have $100 in your Margin Account with 4x leverage, you could make a trade worth up to $400. (Restrictions apply) For access to the additional capital, traders pay a fee expressed in terms of an interest rate. Like like on credit cards or loans.
- “Long” Positions – Being Long in a stock position means that you have purchased and owned the underlying security, with hopes of future price gains.
- When a Long position is being held in a Margin Account (via what’s called leverage), the Long position holder pays a variable interest rate on the borrowed capital.
- “Short” Position – Being Short in a stock means that instead of borrowing capital to be in a stock position, the trader borrows shares of a stock to sell. The goal of a short position is to repurchase the borrowed and sold shares, at a lower price to keep the spread as a gain.
- A Long trader pays a variable interest rate on the amount of capital they borrow. A Short trader pays a variable interest rate based on the amount of borrowed share they sold or “Shorted”.
– There is no silver bullet to guaranteed success when it comes to investing. If anyone ever offers a guaranteed return, especially if its above the average 3-8% per year, be careful. There is risk in everything we do. Trading or investing in any security carries inherent risk. Always do your own research. Alternatively, pay a little bit to have a lawyer review an “opportunity” if it is large.
Most frequent questions and answers
Interest rate is determined by several factors and can change daily. Factors such as available share supply, market demand, short selling, hedging interest, and overall market conditions, can all affect lending rate and income potential.
Not for most passive investors. The biggest draw back for lending your share is that you relinquish your voting rights. Most retail traders might not regularly vote on company initiatives as share holders so this doesn’t affect everyone.
Stock trading and investing
The statistics below reflect the number of your peers who read this article and signed up for WeBull.
How is income determined for share lenders?
Daily Interest Earned= Number of Shares on Loan *Stock Price* Annualized Interest Rate/360*15%. See an example of this to the right ->
Want an Example?
For example, let us say you have 5,000 fully-paid shares of Rocket Companies (RKT). Hypothetically, the stock price of RKT is $100.00 per share and the interest rate is 8% (At the current time of writing, the interest rate on RKT shares is 24.1%). If you have participated in the Stock Lending Income Program, WeBull will automatically lend your shares of stocks according to the demand of the market. The total interest in this example from lending these shares is 5,000*100*8%/360=$111.11. You will receive about 15% of the total interest, so $16.67.