Manufactured Payment

Stock lending is fairly common. Imagine going to your neighbor's house to borrow a cup of sugar. Only, in this case, you're borrowing 500 shares of NFLX. This is "borrowing stock."

The scenario comes up in short-sale situations. Those transactions act as bets that a stock will go down. You borrow the stock from someone else, sell the shares on the open market, then cross your fingers and hope that the share price will fall. If it does, you can buy the stock back at the lower price, give the shares back to the person who lent them to you, and keep whatever profit you booked.

Complications come up in this scheme, however, when the stock involved has a dividend. A dividend is cash that a company sends to its shareholders. It's like a "thank you" payment for the people holding the firm's stock.

A company issues a dividend of $1.00 per share and you hold 1,000 shares...you get a check from the company of $1,000.

But if you borrow someone's stock and sell it, and the company issues a dividend before you return the stock, your buddy (who generously let you borrow their shares) is out of luck when it comes to that dividend. They didn't have the stock when the payments were calculated and sent out.

Enter: a manufactured payment. It involves you paying that dividend on the stock you borrowed. You make up the dividend payments that the original stockholder missed while you were borrowing their stock.

It's like if you borrow someone's car with a full tank of gas. You drive it around for a couple of days and then go to return it, after burning through half a tank of the fuel...fuel they paid for. It's only fair for you to fill up before returning the car. They loaned you the car, but they didn't agree to give you half a tank of gas.

Manufactured payments are the "filling the tank" equivalent of stock borrowing.