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I've just received an offer from my discount broker, Schwab, to participate in a Securities lending program, specifically for one of my stock holdings which is apparently in "high demand". I'd be interested in hearing comments from other Fools who may have participated in this type of program- up until now I've never even heard of such a thing. As an income investor I'm intrigued about the possibility of adding to my monthly income stream. Basics of the program as presented are:
1) in exchange for lending the security I receive a letter of credit for 100% collateral issued from a "large national bank" independent of my broker.
2)Broker pays to me an agreed upon monthly interest rate for the loan plus Payments-In-Lieu of dividends which match those paid out by the coporate security. Since the normal distributions are classified as ordinary dividends I'm not giving up on any tax benefits.
3)I retain the right to sell the securities and can request return of them at any time.
On paper this looks good but I'd appreciate any comments from more experienced Fools regarding any pitfalls in this type of program.
thanks,
Doug
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No. of Recommendations: 1
What they're saying is that there are a lot of people out there who want to short the stock (sell it short) -- that is, bet that the stock price will go down. The folks who would borrow your security would immediately sell it in the market, hoping that the price will go down. If it does, he will purchase it back from someone else at the lower price, and give you back the stock, turning a profit on the stock's decline.

If you accept this plan, you would not own the stock any more and would not have the rights of ownership e.g. going to the annual meeting, getting the shareholder documents, voting in elections.

in exchange for lending the security I receive a letter of credit for 100% collateral issued from a "large national bank" independent of my broker.

What if the stock goes up? Is the borrower required to post additional collateral? I'd really want more than 100% collateral, particularly if I was expecting the stock to go up.

Do note that participating in this program makes it easier for the stock price to go down, and harder for it to go up.
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No. of Recommendations: 0



Hi bluesky111,

I looked at your profile and see you have listed as Favorite Stocks: CZN, GLAD, IRC, ENN, AB, so I plugged them into Yahoo! and found the following and wondered if ENN was the stock you were referring to in your post?

ENN was dribbling along <$20 per share over the last 4 days, but with today's news it jumped an astounding $3.32 (17.15%) with 2,063+% above the Avg Vol (3m): of 585,453! WOW... nice one day gain, especially in this choppy market of the last few days!

http://finance.yahoo.com/q?s=ENN

EQUITY INNS INC. (NYSE:ENN)
 
After Hours: 22.68 0.00 (0.00%) as of 4:27PM ET on 06/21/07

Last Trade: 22.68
Trade Time: 4:00PM ET
Change: 3.32 (17.15%)
Prev Close: 19.36
Open: 22.81
Bid: N/A
Ask: N/A
1y Target Est: 19.33

Day's Range: 22.65 - 24.13
52wk Range: 14.46 - 21.20
Volume: 12,666,089
Avg Vol (3m): 585,453
Market Cap: 1.25B
P/E (ttm): 68.31
EPS (ttm): 0.33
Div & Yield: 1.00 (5.00%)

http://biz.yahoo.com/ap/070621/equity_inns_acquisition.html?.v=3

AP
Equity Inns Sale: $1.26B
Thursday June 21, 5:13 pm ET
Inns to Be Acquired for $1.26B in Cash by Goldman Sachs Affiliate

GERMANTOWN, Tenn. (AP) -- Hotel real estate investment trust Equity Inns Inc. said Thursday it has agreed to be purchased by an affiliate of Goldman Sachs & Co. for about $1.26 billion in cash.
The deal also involves the assumption of $940 million in debt.
--more--


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No. of Recommendations: 1
Hi Hildy
Actually the stock in question is GLAD (Gladstone Capital)which I've been holding for about 18 months now. It's been paying dividends at an effective yield of 8% based on my share purchase price. The brokerage lending program would pay me at a rate of 3%(annual)of the average share price in addition to payment of the full amount the dividend. All in all the program looks pretty good so I'll likely give it a go.
Doug
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