What is stock lending? It's a common practice in which a lender transfers stock or securities to a borrower. The borrower agrees to pay the lender back in equivalent stocks at an agreed upon time. The reasons for stock lending can be cash-driven or securities-driven.

Cash-driven lending gives the lender the ability to increase the returns on a portfolio of underlying stocks by receiving a fee for making its investments available to the borrower. In securities-driven transactions, the borrower seeks specific securities such as equities or bonds in order to facilitate trading. These types of transactions can increase overall income by enhancing returns.

All kinds of securities can be used for stock lending. Equities, corporate debt obligations and government bonds may be included. Both the borrower and the lender in a stock lending transaction operate under standard legal agreements for the practice, and the lender actually retains all benefits of ownership during the course of the agreement, except voting rights. The borrower has the right to use the securities as they deem necessary, possibly by lending them to yet another party, but will be liable to the lender for dividends, stock splits and interest earned.

Stock lending may be used to increase the liquidity of the market, to provide extra security to lenders through collateralization, to give investors a way to earn more income by lending their securities and by facilitating hedging of price differentials.

Stock lending is not harmful to the market and when done correctly can actually assist the market, and those who may have sold stock short.