Earn interest by renting shares you own. The SLBM mechanism is a great way to earn interest on your shares without having to sell them.
What are the ways to earn money in the stock market?
Few are buying a stock and selling once its price goes up, F&O, etc.
This is correct however I am sure that you might not be aware that you can also earn by lending your shares to earn interest.
Comment and tell me if you know this.
The mechanism to lend & borrow shares is called Stock Lending And Borrowing Mechanism SLBM.
Earning renting a house is very common but to earn renting shares, is this even legal?
Do not worry, this is completely legal and regulated by NSE & BSE.
Let’s discuss SLBM in detail and understand how to earn renting shares.
What is Stock Lending and Borrowing Mechanism
SLBM is the process of lending and borrowing stocks between 2 Demat account holders.
In this process, you can either lend your stocks or borrow stocks from another person.
This system was started in 1997 with the purpose to increase liquidity in the stock market.
Since then many investors are making use of this but still, there are many who are not at all aware of SLBM.
The best part is that all the transactions settlement is guaranteed by the stock exchange itself which makes it super secure.
How Renting Shares Work?
Suppose you have 1000 shares of TCS with a buy price of ₹3000 which you want to hold for 5 – 10 years.
Here SLBM becomes a good way to earn a passive income.
Now you tell your broker that out of these 1000 shares you want to lend 200 shares to a borrower for a period of 2 months at 5% interest.
On the other hand, there is a trader who wants to short-sell the TCS stock because he estimates that in the next 1 month, the TCS price will go to ₹2800.
These short-term fluctuations don’t bother you because you are holding TCS for the long term.
The trader borrows stocks from you, sells them suppose at ₹3000, and then when the price goes down to ₹2800 traders buy them back and repay the shares to you.
In this transaction, the trader makes a profit of ₹200 per share.
And you earn an interest of 5% on the shares you lend and get your shares back after 2 months guaranteed by the exchange.
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What if you loan the shares and the borrower defaults?
Thankfully such risk is covered by the stock exchange itself.
You are basically lending stocks to exchange not to an individual and further stock exchange lends it to the borrower.
So, whatever the scenario with the borrower you will get back your lent shares after the end of tenure guaranteed by the stock exchange.
Who will get the benefits of Dividends, Bonuses, and splits into the shares?
Even though you have lent the stocks still you are the actual owner, so all the benefits like dividends, bonuses, and splits are passed to you.
No risk of losing any benefits because of lending.
Can I get back the shares before the completion of the tenure?
You can get back the shares however this would be chargeable. The broker and exchange would charge a fee to facilitate this.
Where to find details of shares that can be borrowed or lent?
The shares that can be borrowed or lent are listed on the NSE website. On the website under MARKET DATA menu click on Securities Lending & Borrowing
Here you will find month-wise data of all securities that you can borrow or lend.
Benefits of SLBM to Lender
Interest Income
You can generate income of around 5-15% from an ideal long-term investment.
Low Risk
Since this SLBM mechanism is facilitated by authorized exchanges like NSE, and BSE so there is no counterparty risk.
Dividends, Bonus, Split
During the lending period all dividends, bonuses, and splits are passed to the lender only.
Benefits of SLBM to Borrower
Short Shares that are not available in F&O
If there is an opportunity where the trader wants to short a share that is not available in F&O at that point trader can borrow through SLBM and sell.
Arbitrage opportunity
These opportunities arise when the price of a share is different on different exchanges so traders can sell at a high price on one exchange and then buy the same at a lower on another.
CONS of the SLBM mechanism
No User Interface
Till now all brokers lack a user interface to facilitate the SLBM facility. To avail SLBM facility you have to raise a ticket with a broker or communicate through emails.
Low Liquidity
SLBM facility is not known by many so there are not many borrowers or lenders in the market.
There can be situations where you may not find a borrower or lender for many days.
How Can I Rent shares in Zerodha?
To avail of the facility of SLBM on Zerodha you can raise an offline request.
Find complete details here.
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Conclusion
The Securities Lending and Borrowing Mechanism (SLBM) is a unique opportunity for you to earn additional income by renting shares you own.
It can be a useful tool if you want to diversify your investment portfolio and generate additional income.
As borrowers can use the borrowed shares to fulfill their short-term needs, lenders can earn a fee on their idle shares so it’s a win-win situation for both borrowers and lenders.
SLBM can be a valuable addition to any investor’s portfolio but with proper planning and careful consideration.
It is essential to conduct thorough research, understand the risks involved, and choose a reputable brokerage firm to work with.
FAQs
Is lending shares a good idea?
Lending shares can be a good source of additional income however it depends on the liquidity of the stocks you own.
Can you make money from lending stock?
Yes, you can earn interest return on the stocks you lend without losing the shares or any dividends, bonuses, and splits into the shares.
How much do you earn from lending shares?
You can generally earn between 5-15% depending on the liquidity of the shares on the exchange.
Can you tell your broker not to lend your shares?
Yes, your broker cannot lend your shares by themselves without permission.
Are lending shares Safe?
In India when you lend through the SLBM mechanism you are dealing with the exchange and not directly with an individual.
So exchanges manage the risk and make the lending and borrowing process very safe.
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