How Brokers Make Money Lending Your Shares

The Mechanics of Securities Lending

When you buy stock through a broker, you own the shares but the broker holds them in "street name." This gives them certain rights—including, often, the right to lend your shares.

Short sellers need to borrow shares before they can sell them. They pay a "borrow fee" for this privilege. Easy-to-borrow stocks (Apple, Microsoft) might cost 0.3% annually. Hard-to-borrow meme stocks can cost 50%, 100%, or even more.

During the GameStop frenzy, borrow rates exceeded 100% annualized. If you held GME at a broker that was lending your shares, they were making serious money.

Two Types of Lending

1. Margin Account Lending (Most Common)

If you have a margin account (even if you've never borrowed), most broker agreements allow them to lend shares without asking. This is called "hypothecation"—it's buried in the fine print you clicked through.

The broker keeps 100% of the lending revenue. You get nothing.

2. Fully Paid Lending Programs (Opt-In)

Some brokers offer programs where you explicitly agree to lend your shares and receive a cut of the revenue:

How Much Money Are We Talking?

For most portfolios of boring index funds and blue chips, lending revenue is minimal—maybe $10-$50/year on a $100,000 portfolio. Easy-to-borrow stocks just don't command high fees.

But if you hold hard-to-borrow stocks, the numbers get interesting:

• Meme stocks (GME, AMC): Rates can exceed 50-100% during short squeezes
• Small-cap biotechs: Often 20-50% annual rates
• Recently IPO'd stocks: Can be very hard to borrow
• SPAC warrants: Sometimes 100%+ rates

During peak GameStop mania, holding $10,000 of GME in a lending program could have generated $5,000+ in annual lending revenue—if you could find a broker willing to pay you.

The Catch: You Lose Some Rights

When your shares are lent out:

• You lose voting rights: The borrower can vote your shares
• Dividends become "payments in lieu": You get the dividend amount, but it may be taxed differently (ordinary income vs. qualified dividend)
• SIPC coverage may change: Lent shares might not be covered the same way

For most casual investors holding index funds, these issues are negligible. For someone holding dividend stocks in a taxable account, the tax treatment matters.

The Ethical Question

Here's the uncomfortable reality: when you lend shares, you're often enabling short sellers to bet against companies you believe in. During the meme stock saga, retail investors were furious that their own shares might be used against them.

Some investors refuse lending programs on principle. Others say: "If someone wants to pay me to bet against my stock, I'll take their money."

There's no right answer—just informed choice.

What You Can Do

Option 1: Opt Out Entirely

Use a cash account instead of margin. In a true cash account, brokers generally can't lend your shares. The trade-off: you lose margin trading ability and potentially other features.

Option 2: Opt Into Revenue Sharing

If your broker offers fully paid lending with revenue sharing, you might as well get paid. Check IBKR's Stock Yield Enhancement, Schwab's Securities Lending, or Robinhood's Stock Lending program.

Option 3: Choose a Broker That Doesn't Lend

Some brokers don't participate in securities lending at all—though this is increasingly rare among mainstream options.

The Bottom Line

Securities lending is another way "free" trading gets subsidized. Your broker holds your assets, monetizes them through lending, and keeps most of the profit.

For typical portfolios, the amounts are small. For meme stocks and hard-to-borrow names, the economics are substantial. Either way, you should know it's happening.

If you hold stocks that might be valuable to short sellers, check whether your broker offers a revenue-sharing program. Getting 50% of something beats 0% of nothing.