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:
- Am I helping people bet against my investments?
- Will lending my shares push the price lower?
- Do I still own my stocks?
- 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. The key is understanding how the process works and separating common myths from reality.
Securities lending allows investors to temporarily lend securities to another market participant in exchange for a 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.
Throughout the financial industry, this service is known as Securities Lending. At Swissquote, the programme is called the Passive Income Plan, but the underlying concept is the same: eligible investors can lend certain securities and potentially earn lending income while remaining invested.
Why investors borrow shares? Myth vs Reality table
When investors hear that their shares could be borrowed, they often assume they are being used to bet against the company. But borrowing shares is a normal part of how financial markets work and can serve several different purposes.
Securities lending has long been used by large financial institutions and is now increasingly available to individual investors through online brokers and banks.
So, how much truth is there behind the common concerns about lending your shares? Let’s take a look at some of the most common beliefs about short selling and see what the reality is.
| Belief | Reality |
|---|---|
| ❌ Short selling drives down stock prices over the long term. | Long-term share prices are primarily determined by company fundamentals, investor sentiment and macroeconomic conditions. Research generally finds that short selling has little or no lasting impact on long-term valuations. |
| ❌ If someone borrows my shares, they're betting against me. | Short selling is only one reason shares are borrowed. Securities are also borrowed for market making, hedging, liquidity provision and settlement. |
| ❌ Lending my shares enables the short sale. | Short sellers typically obtain shares from a broad lending market that includes pension funds, ETFs and institutional investors. Your participation rarely determines whether a short sale takes place, it simply determines whether you can earn income from the demand. |
| ❌ Short sellers ruin companies. | Short sellers can influence short-term sentiment, but over time company performance remains the primary driver of share prices. |
| ⚠️ Short selling increases volatility. | Mainstream research suggests that short selling can reduce volatility, particularly in liquid markets. Short sellers can add liquidity and help prices incorporate negative information more efficiently, supporting overall price efficiency. Any short-term price impact is more likely to be significant in thinly traded or highly volatile stocks. Source: U.S. Securities and Exchange Commission (SEC), “Short Sales”. The SEC is the US federal agency responsible for regulating securities markets and protecting investors. |
| ❌ Short selling is unregulated. | In most major markets, short selling is subject to strict regulation. Borrowers generally must locate and borrow shares before selling them. |
| ✅ Short selling is a normal part of financial markets. | It contributes to price discovery, market liquidity and allows investors to express both positive and negative market views. |
| ✅ Investors can earn additional income from lending shares. | When demand to borrow shares increases, lenders receive lending fees while remaining invested in their holdings. |
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:
- corporate earnings
- business fundamentals
- economic conditions
- 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.
Case study: CoreWeave Inc. (CRWV)
One of the most notable recent examples is CoreWeave.
CRWV recently completed its IPO at $40 per share. Over the following weeks, the stock experienced notable price movements, including a significant rally in mid-May following announcement of a $4B strategic partnership with OpenAI and Nvidia revealing a $900M investment in the company.
+22% in a day.
+250% since IPO.
But that is only one side of the story.
While some investors benefited from the stock’s appreciation, others also participated in securities lending programs, earning additional income by lending out their CRWV shares. During this period, lending rates varied significantly – hovering around 5–10% for weeks and then spiking past 200% by June.
Some investors therefore benefited from both:
- capital appreciation
- 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.
Illustrative example
To help demonstrate the potential impact of securities lending, consider the following scenario:
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:
- how many investors want to borrow the stock
- how many shares are available to lend
- short interest
- market volatility
- corporate events
- 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:
You continue to benefit if the share price rises and remain exposed if it falls. Lending does not remove your economic exposure to the investment.
If your shares pay a dividend while they are on loan, you generally receive a corresponding payment. Tax treatment may vary depending on your jurisdiction and account type.
Lending does not normally prevent you from trading your investment. In most programmes, you can sell when you choose, with the loan being closed or the shares recalled as needed.
Securities lending can give eligible investors an opportunity to generate additional income from their portfolios, while keeping their investment strategy largely unchanged.
Whether you choose to participate depends on your individual objectives and understanding of how the programme works. The more you know about the potential benefits and considerations, the better placed you are to decide whether securities lending is right for you.
Want to find out more? Discover how Swissquote's Passive Income Plan works, which securities may be eligible and how you can potentially earn additional income from your portfolio.
Frequently Asked Questions
What is securities lending?
Securities lending allows investors to temporarily lend eligible shares or other securities to another market participant in exchange for a fee. The borrower provides collateral and later returns the securities.
Why do investors borrow shares?
Shares can be borrowed for several market activities, including short selling, hedging, market making and trade settlement. Short selling is only one part of the securities lending market.
Do I still own my shares when they are lent?
You generally retain the economic exposure to your investment, including gains and losses if the share price changes. Voting rights are typically transferred while the shares are on loan.
Can I still sell shares that are being lent?
Yes. Lending does not normally prevent you from selling your shares. Your broker will generally arrange for the shares to be returned as part of the sale.
How much can I earn from securities lending?
It depends on demand for the specific securities you hold. Lending fees can be modest for widely available shares but may be higher when a stock is in strong demand. Income is variable and not guaranteed.
The content in this article is provided for educational and marketing purposes only. It does not constitute investment advice or financial recommendations.
