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Just like loaning out money carries risk, does loaning out your stock shares also carry risk?

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If the borrower of your shares is short the stock on the ex-dividend date, he pays you the dividend in the form of payment in lieu. Payment in lieu of dividend not tax qualified and the investor must pay the higher regular income tax rate on the amount received (Form 1099-MISC). IOW, you lose your qualified dividend status and its lower tax rate.

The shorter who borrows your shares pays a borrow cost. Some brokers share it with you, the lender, and you can generate some income from lending. This is generally for hard-to-borrow stocks.

Margin is required to take as well as maintain a short position. In the unusual case where the borrower blows up his account and goes negative, it's the borrowing broker's responsibility to make you whole.

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  • @JTP - Apologise to Monica - Thanks for the added info. It makes my answer more complete. Jan 25 at 23:18
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Yes. They wouldn't want to borrow the shares unless they are planning to sell them, and buy them back later.

If the share price goes up unexpectedly, there's a risk that the borrower won't have enough money to buy them back.

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    Do you have any sourcing that demonstrates that a share lender lost money because the borrower did not "have enough money to buy them back" ? Jan 25 at 21:40
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    Yeah, would also like to know whether this EVER was an issue.
    – TomTom
    Jan 25 at 22:20
  • @BobBaerker Is the scenario described by Simon B not at least a theoretical possibility? Jan 25 at 22:29
  • @BobBaerker So far, I've found an incredibly vague line "A handful of funds lost money from their securities-lending programs during the financial crisis" morningstar.com/insights/2019/01/17/securities-lending
    – Simon B
    Jan 25 at 22:31
  • Your link refers to institutional lending directly from lender to borrower. For retail shorting, there are 3 to 4 parties involved depending on whether the shares are in house or borrowed from another broker. What needs qualification is whether the broker is at risk or the account that is lending the shares. My recollection is that the broker(s) is on the hook... and I have no sourcing for that. Jan 25 at 23:08

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