What is Buying on Margin?

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In financesecurities lending or stock lending refers to the brokerage margin loans for trading of securities by one party to another. The terms of the loan will be governed by a "Securities Lending Agreement", [1] which requires that the borrower provides the lender with collateralin the form of cash or non-cash securities, of value equal to or greater than the loaned securities plus agreed upon margin.

Non-cash refers to the subset of collateral that is not pure cash, including equities, government bonds, convertible bonds, corporate bonds, and other products. The agreement is a contract enforceable under relevant law, which is often specified in the agreement. As payment for the loan, the parties negotiate a fee, quoted as an annualized percentage of the value of the loaned securities. If the agreed form of collateral is cash, then the fee may be quoted as a " short rebate ", meaning that the lender will earn all of the interest which accrues on the cash collateral, and will "rebate" an agreed rate of interest to the borrower.

Key lenders brokerage margin loans for trading securities include mutual funds, insurance companies, pension plans and other large investment portfolios. Securities lending is an important means of eliminating "failed" transactions as well as enabling hedge funds and other investment vehicles to sell shares short. Until the start ofsecurities lending was only an over-the-counter market, so the size brokerage margin loans for trading this industry was difficult to estimate accurately.

In an example transaction, a large institutional money manager with a brokerage margin loans for trading in a particular stock would allow those securities to be borrowed by a financial intermediary, typically an investment bank, prime broker or other broker-dealer, acting on behalf of one or more clients; after borrowing the stock, these clients could sell it short. The short seller would like to buy the stock back at a lower price which would create a profit.

Once the shares are borrowed and sold, it generates cash from selling the stock. That cash would become collateral for the lender. Often a bank serves as the lending agent, receiving the cash collateral and investing it until it must be returned.

The income from the reinvested cash collateral is divided by paying the borrower a rebate and then dividing the remaining amount between the securities lender and the agent bank. This allows major investment funds to earn incremental income on their portfolio holdings.

Securities lending brokerage margin loans for trading legal and clearly regulated brokerage margin loans for trading most of the world's major securities markets. Most brokerage margin loans for trading mandate that the borrowing of securities be conducted only for specifically permitted purposes, which generally include.

When a security is loaned, the title of the security transfers to the borrower. In most cases, these dividends or coupons must be passed back to the lender in the form of what is referred to as a "manufactured dividend". The initial driver for the securities lending business was to cover settlement failure. If one party fails to deliver stock to you it can mean that you are unable to deliver stock that you have already sold to another party. In order to avoid the costs and penalties that can arise from settlement failure, stock could be borrowed at a fee, and delivered to the second party.

When your initial stock finally arrived or was obtained from another source lender would receive back the same number of shares in the security they lent. The brokerage margin loans for trading reason for borrowing a security is to cover a short position. As you are obliged to deliver the security, you will have to borrow it.

At the end of the agreement you will have to return an equivalent security to the lender. Equivalent in this context means fungiblei. Compare this with lending a ten euro note. You do not expect exactly the same note back, as any ten euro note will do.

As a result of Regulation SHO, adopted by the SEC, short sellers typically must either possess the shares they are selling short or have a right to obtain them in order to cover the short sale. In securities lending, securities are classified by their availability to be borrowed. Highly liquid securities are considered "easy"; these products are easily found on the market should someone decide to borrow them for the purpose of selling them short.

Securities brokerage margin loans for trading are illiquid in the market are classified as "hard". Due to various regulations, a short sale transaction in the United States and some other countries must be preceded by locating the security and quantity that one would like to be able to sell short in order to avoid naked shorting.

However, the lending broker can create a list of securities that do not require such a locate. This list is referred to as an easy-to-borrow abbreviated as ETB list, and is also known as blanket assurances. Such a list is generated by broker-dealers based on "reasonable assurance" [8] that the securities on the list are readily available upon customer request.

However, if a security on the list cannot be delivered as promised a "failure to brokerage margin loans for trading would occurthe assumption of reasonable grounds no longer applies. In order to provide better grounding for such assumptions, the ETB list must be at most 24 hours old. Securities lendersoften simply called sec lendersare institutions which have access to 'lendable' brokerage margin loans for trading.

This can be asset managers, who have many securities under management, custodian banks holding securities for third parties or third party lenders who access securities automatically via the asset holder's custodian. The international trade organization for the securities lending industry is the International Securities Lending Association. According to a June survey, their members had euro 5.

In Junethese had USD 5. Typical borrowers include hedge funds and the proprietary trading desks of investment banks. In investment banking, the term "securities lending" is also used to describe a service offered to large investors who can allow the investment bank to lend out their shares to other people.

This is often done to investors of all sizes who have pledged their shares to borrow money to buy more shares, but large investors like pension funds often choose to do this to their unpledged shares because they will receive interest income. In these types of agreements, the investor still receives brokerage margin loans for trading dividends as normal, the only thing they cannot generally do is to vote their shares.

The term "securities lending" is sometimes used correctly in the same context as a "stock loan" or individual "securities-collateralized loan". The former brokerage margin loans for trading to brokerage margin loans for trading actual lending typically of banks or brokerages to other institutions to cover short sales or for other temporary purposes.

The latter is used in private or institutional securities-backed loan arrangements across a wide spectrum of securities. In recent years, FINRA has cautioned all consumer to avoid nonrecourse transfer-of-title stock loans, but they enjoyed a brief popularity before the SEC and IRS came to shut almost all such providers down between —, reclassifying nonrecourse transfer-of-title title stock loans brokerage margin loans for trading fully taxable sales at inception See FINRA advisory link below.

Today, it is widely accepted that the only legally valid consumer lending programs involving stocks or other securities are those in which the stocks remain in the client's title and account without sale through a fully licensed and regulated institution with membership in the SIPC, FDIC, FINRA and other mainline regulatory brokerage margin loans for trading, with their own audited financial statements.

These are usually in the form of securities-based credit lines. FINRA states that securities should never be sold to fund the loans ; 2 Does the lender have audited financials? Currently such institutional credit line programs are available only through long-standing depository relationships with institutional brokerages and their banking arms, and typically come with large depository minimums.

However, there are a few securities-based credit line programs currently available in the general market that allow access at competitive rates and terms without such advance depository or client relationships. A search for terms such as "wholesale stock loan" or "no title transfer stock loan" usually brings up a list of such providers. During this life cycle, various life cycle events will occur:. Historically, the securities brokerage margin loans for trading market has been a very manually intensive one, with post-trade processing involving many man hours of effort.

In recent years, various vendors have appeared to help provide much needed automation in the industry. The market leader in Europe for post-trade processing, Pirum[10] has been providing such automation services to its clients sincemore recently working with Eurex on automating Brokerage margin loans for trading services. From Wikipedia, the free encyclopedia.

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