GMB Ep #88: How Securities Lending Drives Down Investment Costs

 

Securities lending is one of the widely misunderstood concepts in the investment community, and securities lending shows up intermittently in the news for both positive and negative reasons. However, this complex trading pattern driven by short selling can drive down costs for the investors. In today’s episode, Grant dives deep into how securities lending works, the different parties involved in it and their roles, how investors participate in securities lending, and how it impacts the performance and costs of ETFs and mutual funds.

 

 

Show Notes

[02:40] Understanding Securities Lending – How securities lending works, how it relates to investment funds that many people put their money in, and how it generates revenue for brokerage firms.

[07:13] Trading Settlement – The process of trading securities is a bit more complex than it looks from the outside. Grant reviews how trade settlements work and how securities lending comes into play.

[12:50] Short-Squeeze – How unexpected fluctuations in stock price can cause investors to lose money in certain scenarios.

[13:47] Driven by Short Selling – Grant reviews how securities lending transactions between several parties create a complex ecosystem that facilitates short selling and how the demand for securities lending is driven by short selling.

[16:23] Supply and Demand – How brokerage firms can make money through securities lending depending on the demand for shares.

[19:10] Sources of Supply – Grant explains the sources brokerage firms use to get the securities they lend to other parties and how investors can make money by lending securities to brokerage firms in some scenarios.

[21:40] ETFs and Mutual Funds – How ETFs and mutual funds are involved in securities lending as another source of supply and how it benefits investors by reducing expenses.

[27:20] Facilitating Short Selling – A common argument about securities lending is that you may not want your shares to be lent out because you don’t want to facilitate short selling in a company that you own. Grant shares his take on the relevance of this idea.

 

Resources

My Take On Short Selling: www.abovethecanopy.us/my-take-on-short-selling/

Posted in Business Ownership, Financial Planning, Investing, Podcast and tagged , .

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