July 29, 2020
Day 126 of lockdown and Covid-19, cases may be moderating?
EasyEquities users got all heated last week on Twitter as EE put T&Cs about script lending into their new mandate. I not commenting on the EE offer as they've withdrawn it. But many have asked about script lending as a concept.
If I want to go short (make money from a falling stock) I need to sell shares and naked shorting is not allowed by the JSE (or most exchanges). So I need to borrow stock from somebody.
Usually, you borrow from a large institutional investor who has plenty, you pay a fee and will also be liable to pay the lender any entitlements such as dividends.
This process happens in the background when you're shorting via derivatives and why some shares are not sortable, no script to borrow.
The script lender earns a fee, but there is risk so default.
Maybe they can't afford to close out the position. remember they sold to buy back lower, but what if an offer arrives and the stock jumps say 50%?
It certainly can and some income to a portfolio but the risk needs to be managed and the income is fairly modest. That said I've never lent out my script but I have borrowed script in recent years for some shorting (Aveng and Lonmin).
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