A Smart Investing Option: Understanding Stock Lending And Borrowing (SLB)

AUTHORSuraj Puneli

The stock market provides traders and investors with numerous ways to earn. Once you open demat account online, to profit on market swings, individuals can purchase stocks at a discount and sell them for a profit. But there are other ways to make money with the stock markets other than that. To make extra money, you can also lend or borrow stocks from other investors through Securities Lending and Borrowing Mechanism (SLBM).

What is a Securities Lending and Borrowing System?

A system called Securities Lending and Borrowing (SLB) allows clients to lend or borrow securities at a predetermined cost and duration.

Through the Securities Lending and Borrowing Mechanism (SLBM), investors can lend their securities to traders who want to short sell them for a price. In addition to giving the market liquidity, this allows investors to get additional money from their assets. A loan and borrower agreement outlining the terms and conditions of the transaction is necessary for SLBM, which is governed by SEBI in India.

The Mechanisms of SLB

Let’s say an investor has 100 shares of stock A, someone else might want to borrow them for a month and pay Rs. 2 for it. This means the investor can make Rs. 24 in a year (which is like a 24% yearly profit) without taking any risks. But, before doing this, they need to sign a form called SLB Rights and Obligations.

The investor who is eager to lend the shares in their portfolio can then provide the broker instructions to place a loan order in the system.

Institutions and traders that are eager to hedge their holdings in the futures and options (F&O) market borrow most stocks and securities. In most cases, traders, derivative fund managers, and other organizations that use the SLB facility to short sell equities are also included among the borrowers.

Authorized clearing corporations set up an automated screen-based order matching platform that facilitates SLB operations. These businesses also serve as the primary counterparty, guaranteeing settlements and collecting margin for them.

For all of its transactions, SLB uses a T+1 settlement cycle. This suggests that on the day after the deal, the borrower receives their borrowed stocks and the lender obtains their loan fees.

The trade is deemed canceled on the expiration date, which falls on the first Thursday of every month, or when the lender or client recalls their shares. When a transaction expires, the stocks immediately return to the original lender`s account. Since the SLB trade is only regarded as a temporary loan and not a true capital transfer, any associated corporate action benefits to the shares lent belong to the original lender.

Benefits of SLB for Lenders

1. Depending on demand and time value, lenders might make more money from the idle portfolio they have because they are paid a specific charge to lend the stock.

2. There is no minimum amount that a lender is required to lend.

3. Throughout the loan term, lenders are entitled to all business actions, such as bonuses and dividends.

Benefits of SLB for Borrowers

1. Upon borrowing from the SLB sector, borrowers are able to engage in short sales of securities that are not available in the derivatives segment.

2. In the event of a delivery deficit, SLB enables borrowers to fulfill their obligations and prevents an auction (seller shortage) in the Cash category.

3. In the event that the prices of cash and derivatives fluctuate, SLB gives borrowers the chance to take advantage of an arbitrage opportunity.

4. Under the derivatives area, SLB helps borrowers fulfill the obligation resulting from physical settlement.

Documents Needed When Considering SLBM

When you opt for SLBM, you must provide certain essential documentation, including:

1. PAN Card

2. Your identity documents, such as your driver`s license, passport, voter ID card, and Aadhaar card

If there are any more documents you need to submit, you can inquire with your broker.

Conclusion

For investors, lending and borrowing stocks is a useful tool that lets them guarantee greater market liquidity, make extra money, and meet their settlement commitments. Even if there are many benefits you still need to be mindful of risks and follow SEBI guidelines to protect yourself from financial loss.

You can open demat and trading account with JK Securities and begin investing in stocks right away.