For long-term investors, the goal is to earn stable returns by diversifying your portfolio and riding out market volatility over several years or even decades. This strategy should protect your portfolio and allow it to grow over time.
To be a long-term investor, the act of making an investment is crucial. This is because if you want to see your money grow over time, you need to invest in stocks backed by businesses you deem will continue to grow and deliver value over time.
Doing this, there are two main ways you would earn returns – dividends and capital appreciation. Of course, dividends is usually the returns that companies give out to shareholders to share in profits of the company. Capital appreciation, on the other hand, is the returns investors receive through increases in price of the company’s stocks. This can happen as a result of keeping profits rather than distributing it, or more commonly by expanding their business and improving their revenue and profitability.
One other way investors can earn additional returns on their investments is to lend out their shares to other investors.
Lending Out Your Shares
If you keep your investment portfolio over the long term, you can consider lending out these shares to earn additional returns.
For those who aren’t sure what this means, you’re essentially choosing to lend your shares to someone else who is likely trying to short the company. The person has the view that prices of your stocks will fall over a certain time period, so he or she borrows from you to sell and then buy it back at a lower price to return it.
This whole process is usually done with an intermediary in the middle. It consolidates the shares that people are willing to lend out as well as acts as a marketplace for people who want to borrow shares. This makes the process safer and more accessible to all investors. However, they also charge a fee for this service.
While you may consider this action to be harmful for your investment as you’re helping someone who is trying to devalue your stocks, studies have shown that there are actually positive outcomes.
It provides liquidity to the market, allowing people to buy and sell more freely and at prices that reflect market perceptions more accurately. It allows traders to long as well as short the market to earn profits. Lastly, it also provides investors with another avenue to earn additional returns.
Does This Mean I Am No Longer The Rightful Owner Of The Shares? Do I Lose Out On Dividends And Being Able To Attend AGMs? Can I Still Sell My Shares?
You may be interested but have a lot of questions. You can ask your brokerage firm to respond to all your questions.
On our part, we can tell you that it is common as part of the contract to lend out your shares, that you will still be entitled to dividends and will be updated on relevant corporate actions of the relevant companies. You will also be able to sell your shares at any time you wish.
Earning Additional Returns
This method allows you to earn an additional return on your investment by lending it out to someone else who wants it. There are several intermediaries that offer this facility to local investors.
The Singapore Exchange (SGX) is one such intermediary. On its website, It lists the shares that are or aren’t available as well as detail the number of shares it has available. It also shows that its borrowing rate is 6% while its lending rate is 4% – letting us know that it earns close to 2% margin for this service.
What this means is that it charges people who wish to borrow the shares 6% per annum and gives 4% of it to investors who are willing to lend out their shares. Importantly, just putting your shares with the SGX to lend out will not earn you the additional return.
You will only receive returns once they have managed to lend out the shares and during the period that your shares have been lent out. This means the actual returns you receive will usually not amount to anywhere close to 4% as borrowers tend to short and buy back shares within a short timeframe.
We have used SGX in our example, however, many of the major brokerages in Singapore do offer such services and you should contact your usual broker to find out if they provide such a service as well as probability of your shares being lent out.
What Else Should I Think About?
You may be liable for certain upfront fees to transfer your shareholdings to be held by your brokers. This will enable them to lend out your shares. Do note that you should ask if your brokers charge a fee for maintaining this new account, generally referred to as a custodian account, that you will set up with them.
There will also be some handling fees in some instances for settlement of contracts as well as to handle corporate actions. So, you should also check on all fees that you will have to pay. This may differ from brokerage to brokerage.
As with all returns, you will be exposed to certain risks of default. However, many brokerages require their clients to provide the full amount of the contract as collateral. This should mitigate most of your risks.
Also, we’ve already mentioned this, but you should not bank on receiving the returns from lending out your shares. This is because if no one wants to borrow your shares, you will not receive the returns. In some instances, you may have to hit a certain threshold such as a minimum of $50,000 in value before being able to lend out your shares.