Securities Lending

  

See: Margin.

When you create a margin account at your brokerage, you are essentially using your own securities as collateral for the purposes of "lending them" against incremental purchases.

Like...you have $10 million in MSFT stock. You can lend those securities "to yourself" to generate $5 million more in buying power with a 50% margin limit. Common practice. Risky, if the market goes down. And you'll pay the brokerage a few percent in margin fees for their acting as intermediary in that securities lending experience.

So...here's to bull markets.

Related or Semi-related Video

Finance: What is Hypothecation?7 Views

00:00

Finance a la shmoop what is hypothecation? alright well here's apothecation

00:08

and yes all legal drugs even the absinthe there but hypothecation is [Man discussing hypothecation appears]

00:14

something totally different although it does involve some forms of alchemy at

00:18

least a financial alchemy in fact hypothecation is basically the process

00:22

or rules behind pledging collateral for a loan jimmy walnuts has gotten out of [Jimmy walking down the street]

00:28

the Mafia game he wants to take all the dough he made shaking down kwik-e-mart [Jimmy running from police with cash]

00:33

and invest it and he wants his investment account at his stock

00:37

brokerage to be a margin account well he has a hundred grand in the account and

00:41

with a 50% margin limit Jimmy can borrow or margin up to 50 grand worth of his

00:47

stock to you know buy stuff like a new Beemer without all the bullet holes in [BMW car with bullet holes]

00:53

it so he will hypothecate his 100 grand in stocks as that collateral borrowing

00:58

forty seven thousand dollars to buy the car and all is good

01:02

well eventually jimmy plans to pay down his margin account with both cash he [Jimmy carrying cash to woman]

01:06

deposits in there and also through the dividends that the account generates on

01:10

its own which usually exceeds the margin interest that the brokerage is charging

01:15

him so where does hypothecation run into trouble well what if Jimmy wanted to buy

01:20

10 cars like you know he just had a fetish for em and he pledged

01:24

forty-seven thousand for this baby yeah the Beemer but then he also wanted that

01:28

baby for 22 grand and while this one for 35 grand and that one for 70 well he

01:34

can only pledge his collateral once for one setting or one purchase that is he

01:40

can't go to one car seller and promise him the hundred thousand dollars that's

01:44

in his brokerage account as collateral for this used Ferrari and then go to a

01:48

different car seller and pledge him the same hundred thousand dollars that's in

01:51

his brokerage account for that 1973 James Bond Aston Martin and then go to a

01:56

third car seller and do the same thing basically he's promising collateral to a

02:00

whole bunch of people well beyond what that collateral is actually worth and

02:04

basically lying about you know what he's got in his pocket quickly he will have [Man discussing Jimmy's collateral]

02:08

pledged a few hundred thousand dollars worth of collateral in a brokerage

02:12

account that only had value of 100 grand so yeah unless you're

02:15

you know connected we don't recommend going the Jimmy walnuts route [Jimmy appears tied up]

Up Next

Finance: What Does It Mean to "Buy on Margin"?
20 Views

What does it mean to “Buy on Margin”? Buying on margin basically means that an investor is using the securities they own as leverage to buy mor...

Find other enlightening terms in Shmoop Finance Genius Bar(f)