When you invest in stocks or exchange-traded funds (ETFs), you typically expect to pursue returns on the assets you already own through price appreciation or dividends. But there’s another way to potentially generate income from your current holdings: fully paid securities lending.
By participating in a fully paid securities lending program, such as Ally Invest’s Securities Income Program, an investor has the opportunity to turn idle portfolio positions into an active income stream without changing their overall investment strategy.
Read more: Using tools in your account to invest on your own with Ally Invest
What is fully paid securities lending?
A fully paid securities lending program allows an investor to lend a stock or other security to a financial institution. The borrower — typically a brokerage firm, such as Ally Invest — reviews your portfolio to determine which securities are currently in demand in the lending market.
Once you enroll in the Securities Income Program at Ally Invest, the process is automatic. The borrower identifies the eligible shares and can loan them out at any time. To protect you for the duration of the loan, the borrower provides collateral in the form of the security’s cash value. This means that while you'll still see the security listed in your account, it's technically replaced by cash collateral while the security is loaned out.
By participating in a fully paid securities lending program, an investor has the opportunity to turn idle portfolio positions into an active income stream without changing their overall investment strategy.
Investors might use this as a strategy to generate passive income because it allows you to potentially earn interest on securities that would otherwise sit idle. Importantly, you still own the shares and can sell them whenever you want.
Learn more: Ally Invest’s Self-Directed Trading Account
How it works, step by step
Participating in a program like Ally Invest’s Securities Income Program is designed to be a fairly hands-off experience, once you're enrolled. Here's how the process usually unfolds:
1. Enroll at the account level
To get started, you simply provide consent to enroll your account. There are no fees to join, and once you’re opted-in, the heavy lifting is handled for you.
2. Shares are located and loaned
The borrower (the brokerage or financial institution) reviews your portfolio to identify securities that are currently in high demand. If you hold shares that other traders want to borrow, those shares could be automatically loaned out.
3. Collateral and interest rates are set
To protect you, the borrower must provide collateral (at least 100% of the security’s market value). The interest rate you earn is determined by market demand. Securities that are "hard to borrow" (i.e. they're in high demand), typically have a higher interest rate.
4. You earn income while on loan
While your shares are borrowed, they accrue daily interest. You’ll typically see this earned interest reflected in your account activity and monthly statements.
5. You can sell or recall
Most importantly, you maintain full control. If you decide it's time to sell your shares, you can do so normally. The lending agreement simply ends, and you receive the proceeds from your sale as usual.
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Benefits and income potential
A fully paid securities lending program offers several unique advantages for investors:
Earn extra income: Generates passive income on positions that would otherwise just be sitting in an account
Maintain economic exposure: Even though the shares are on loan, they're still subject to any price movements, so they continue to be fully invested
Flexibility: There's no locked timeframe. Investors can transact normally if they choose to do so
Broad applicability: Many popular stocks and certain exchange-traded funds (ETFs) with high borrow demand are eligible, not just obscure securities
Key risks and important considerations
While the program is designed to be hassle-free, there are a few technical changes to your account status during the period when your shares are on loan.
Counterparty and default risk
When you lend shares, you are relying on the borrower’s ability to return them. Because of this "counterparty risk," Ally Invest provides collateral of at least 100% of the loan value to help protect your investment in the event of a default.
SIPC and account protections
It’s important to note that shares currently on loan are not covered under the Securities Investor Protection Corporation (SIPC). This is why the 100% cash collateral mentioned above is so critical — it serves as your primary protection while the shares are technically "out" of your account.
Dividends and payments in lieu
If your loaned shares pay a dividend, you won’t receive a "dividend" in the traditional sense. Instead, you'll receive a substitute payment in lieu of dividends (also known as a "manufactured payment"). While the dollar amount is the same, it may be taxed at a different rate.
Voting rights and corporate actions
When shares are loaned out, you temporarily forfeit your proxy voting rights to the borrower. If participation in a specific corporate vote is important to you, you would need to recall your shares before the record date.
Market dynamics and short sales
Financial institutions generally borrow shares to facilitate short sales (where a trader bets on a stock's price to fall). While your lending helps the market stay liquid, it's worth knowing that your shares are being used to support these types of trades.
Program disclosures and fees
Always review the specific program disclosures. At Ally Invest, there are no costs to participate, and the income you receive is a net amount after any internal fees are accounted for.
How income is calculated
Your income is based on a daily interest rate applied to the value of the shares on loan. Because market demand for specific stocks can change overnight, the rate may fluctuate. Generally, the more "in-demand" your shares are, the more you stand to earn.
Taxes and recordkeeping
Taxation is one of the most important things to consider. Because you receive "substitute payments in lieu" rather than actual dividends, those payments are typically taxed at your marginal tax rate rather than the lower preferential rate usually applied to "qualified" dividends.
With fully paid securities lending, instead of a standard Form 1099-DIV, you’ll receive a Form 1099-MISC to help with your recordkeeping. We recommend discussing your unique situation with a tax professional to understand how this might affect your specific tax bracket.
Is fully paid securities lending for you?
Participating in fully paid securities lending, such as Ally Invest’s Securities Income Program, is a method of generating passive income through your portfolio. By understanding the mechanics and the trade-offs, such as voting rights and tax treatment, you can put yourself in a better position to decide if enrolling your account is the right move for your investment journey.
