Securities lending explained: Myths, facts and what every investor should know about short selling

If you've ever been offered the opportunity to lend your shares through your broker, your first reaction may have been hesitation.

Many investors immediately ask themselves:

1. Am I helping people bet against my investments?
2. Will lending my shares push the price lower?
3. Do I still own my stocks?
4. Is securities lending only for large institutions?

These concerns are understandable. Short selling has long been one of the most misunderstood aspects of financial markets.

Yet securities lending has become a standard feature at many global brokerage platforms, allowing investors to earn additional income from shares they already own while remaining invested.

The key is understanding how the process works and separating common myths from reality.

Securities lending allows investors to temporarily lend shares they already own to another market participant in exchange for a lending fee.

The borrower provides collateral and agrees to return the shares later. During the loan period, the lender generally remains fully exposed to any gains or losses in the stock price and continues to receive dividend-equivalent payments.

This is probably the most common concern among investors.

The reality is that retail investors are not "enabling" short selling.

Professional market participants usually have access to shares from pension funds, ETFs, mutual funds and other institutional investors. In liquid markets, an individual investor's decision to lend (or not lend) rarely affects whether a short position is established.

The only practical difference is whether the lending fee is paid to you or to another shareholder.

If you believe in a company over the long term, the idea of lending shares to someone who expects the price to fall may seem contradictory.

However, decades of academic research suggest that long-term share prices are driven primarily by:

1. corporate earnings
2. business fundamentals
3. economic conditions
4. investor expectations

Short selling may influence prices over very short periods in certain illiquid securities, but it has not been shown to determine long-term valuations.

Many investors assume every borrowed share is used for short selling.

In reality, securities lending supports a wide range of market activities.

Borrowed securities are commonly used for:

• market making
• hedging derivative positions
• facilitating ETF creation and redemption
• settling trades efficiently
• short selling

Short selling represents only one part of a much broader securities lending ecosystem.

One of the most notable recent examples is CoreWeave.

Following its IPO in March 2025, the company's shares rose dramatically during the following months. At the same time, exceptionally high demand for borrowed shares resulted in unusually elevated lending fees.

Some investors therefore benefited from both:

1. capital appreciation
2. lending income

However, this was an exceptional situation. IPOs often experience unusually high volatility and lending demand, and these outcomes should not be considered typical.

For most stocks, lending fees are considerably lower and depend entirely on market demand. The lending fee is not fixed. Instead, it reflects supply and demand. Factors that influence lending rates include:

1. how many investors want to borrow the stock
2. how many shares are available to lend
3. short interest
4. market volatility
5. corporate events
6. IPO activity

Highly liquid blue-chip stocks may generate only modest lending income, while difficult-to-borrow stocks can command significantly higher fees. Although your shares are temporarily on loan, you generally retain their economic exposure.

This means:

1. you continue participating in price gains and losses
2. you receive dividend-equivalent payments
3. you can usually sell your shares whenever you choose

One important difference is voting rights.

While shares are on loan, voting rights are typically transferred to the borrower. Investors who wish to vote at shareholder meetings can usually recall their shares before the relevant record date.

Tax treatment of dividend-equivalent payments may vary depending on your jurisdiction.

In most securities lending programmes, yes.

Your broker generally recalls the shares or closes the lending arrangement automatically when you sell your position.

For investors, lending usually does not restrict normal trading activity.

Short squeezes occur when rising prices force short sellers to buy back shares quickly, pushing prices even higher.

During these periods, two things may happen simultaneously:

• investors benefit from rising share prices
• borrowing demand increases, potentially boosting lending fees

However, short squeezes are often accompanied by heightened volatility and should not be viewed as typical market conditions.

Not necessarily.

Larger portfolios may generate more lending income in absolute terms, but lending opportunities depend on the specific shares held rather than portfolio size.

Many popular growth stocks and recently listed companies frequently experience elevated borrowing demand.

Even relatively small portfolios may occasionally generate meaningful lending income if they contain shares that become difficult to borrow.

Like any investment activity, securities lending is not risk free.

Potential risks include:

• counterparty risk
• collateral risk
• changes in lending demand
• tax treatment of dividend-equivalent payments
• temporary loss of voting rights

Most lending programmes include collateral requirements and operational safeguards designed to reduce these risks, but investors should always understand how their broker's programme operates before participating.

Short selling is often viewed with suspicion, yet it has become an established part of modern financial markets. It supports liquidity, facilitates efficient trading and contributes to price discovery.

For investors, securities lending offers an opportunity to generate additional income from shares they already own without necessarily changing their long-term investment strategy.

Whether securities lending is appropriate depends on each investor's objectives, risk tolerance and understanding of the programme offered by their broker. By separating myths from facts, investors can make a more informed decision about whether this increasingly common feature deserves a place in their portfolio strategy.

What is securities lending?

Securities lending allows investors to temporarily lend shares they own to other market participants in exchange for a lending fee. The borrower provides collateral and later returns the shares. At Swissquote, this plan is called "Passive Income Plan".

Why do investors borrow shares?

Borrowed shares are used for several purposes, including short selling, market making, hedging, liquidity provision and facilitating the settlement of trades.

Do I still own my shares if I lend them?

You generally retain the economic exposure to your shares, including any gains or losses in price, and usually continue receiving dividend-equivalent payments. Voting rights are typically transferred while the shares are on loan.

Can I sell shares while they are being lent?

Yes. Most brokerage securities lending programmes allow investors to sell their shares at any time, with the lending arrangement typically ending automatically.

Is securities lending safe?

Like all investment activities, securities lending carries risks, including counterparty and collateral risk. Most programmes require borrowers to provide collateral and follow established risk management procedures.

How much can investors earn?

Lending income depends entirely on market demand for specific shares. Widely available stocks generally generate modest fees, while difficult-to-borrow securities can occasionally earn significantly higher lending rates.

Does lending my shares affect the stock price?

Research generally indicates that securities lending has little or no lasting impact on long-term share prices, which are primarily driven by company fundamentals and broader market conditions.

Is securities lending only for professional investors?

No. While institutions have used securities lending for decades, many online brokers now offer securities lending programmes to eligible retail investors as well.

The content in this article is provided for educational and marketing purposes only. It does not constitute investment advice or financial recommendations.