In financial terms, stock lending or stock finance refers to the borrowing of securities from another party. The borrowing party can be a firm that buys securities in order to make its own financial decisions, a business that buys securities in order to finance expansion, or a bank that buys securities in order to increase their leverage with the borrower.
Stock financing is used to help make a financial decision, or to meet an immediate need for funds. The borrowing party may also use stock loans to acquire assets to fulfill future plans, such as purchasing land to build a factory, or to buy equipment to produce goods. Investors may borrow stock either to make a short-term investment, or as a means of securing long-term capital.
The purpose of stock lending is to purchase securities at a price that is less than the value of the underlying asset being lent. Because these securities are being bought at a lower price than their true value, there is an obvious advantage for the lending party, namely a reduction in the amount of capital it has to pay. This means the lender will receive more money at lower interest rates than it would if it were paying full price for the securities. The end result is the lender making money on the stock loan.
Since there is a reduction in capital, the lending party has the option to borrow more than one kind of investment vehicle. They may borrow in different kinds of stocks in order to diversify their investments. For example, they could borrow in different kinds of agricultural commodities, such as corn or soybeans. They could also borrow in a variety of different industries, such as oil and gas, or in different businesses, such as real estate or manufacturing. All of these industries present a large number of potential opportunities for investment. These opportunities, combined with the reduced risk and higher returns, mean that stock lending provides financial benefits to lenders.
Because of the reduced risk associated with stock financing, borrowers typically have higher capital requirements than other forms of lending. These requirements typically include more documentation and can even include a personal guarantee. However, lenders who meet these higher capital requirements have the opportunity to obtain more favorable terms when it comes to interest rates, fees and conditions of repayment, and other terms.
Regardless of the type of company the lender is working with, they need to make sure they are able to obtain the lowest rate possible for a stock loan. Since there is more risk for the lender, lenders who choose to work with larger companies may require a larger down payment on the loan itself, or may require higher interest rates.