SLB Mechanism | Stock lending and borrowing mechanism | Securities lending and borrowing mechanism

👉(1/6)  What is stock lending & borrowing?

Stock lending and borrowing (SLB)is a transaction in which investors or traders borrow shares that they do not already have, or lend the stocks that they own but do not willing to sell in short term. 

Just like in a loan, SLB mechanism transaction happens at a interest and time that is fixed by the borrower  and lender before the transaction. However there is some difference between SLBM and loan. Loan interest rate is decided by the banker and SLBM interest rate is decided by the buyer, seller and other market conditions.

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👉(2/6)  What is the rate of interest in SLB?

The rate of interest in a stock lending and borrowing mechanism is decided on the stock’s value on that day. Mostly, rates are calculated on a monthly basis.

Rate of interest also can be decided for quarterly,monthly or yearly basis, but due to liquidity issues mostly transactions are carried on monthly settlement cycle. 

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👉(3/6)  Who are eligible to lend stocks or securities?

Stocks are mainly lend by long term and medium term investors who can hold stocks for a longer duration and do not willing to sell in short term.

They can earn extra income on their long term investments through SLBM mechanism.

The stocks which are included in derivatives are eligible for SLBM transactions. 

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👉(4/6)  What is tenure for stock lending and borrowing mechanism transaction? 

Stocks borrowed or landed can be any tenure between 1 month to 12 months on monthly settlement cycle. Every SLBM transaction is marked with the month in which is due to be settled. 

The first Thursday of each month is the settlement data for returning the shares to the lender, same like the derivative settlement cycle of last Thursday. 

The time fixed in a transaction is not strict in nature. The lender or borrower can cancel the transaction any time between the tenure. 

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👉(5/6)  Why do traders and investors lend or borrow stocks ? 

The main motive of SLB mechanism is to short sell the borrowed stock in a short term or swing trade and once the price falls borrower can buy the stock again and return it back to the lender in stock exchange. 

The net profit or loss of the borrower is determined by the difference between buying and selling price, deducted by the interest and other charges. 

The interest earned by the lender is an extra income on a long term Investments.

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👉(6/6)  Stock lender or borrower risks

Stock borrower risk

If the borrower is willing to short sell the stock then the 125% of the stock value is locked by the stock exchange of a borrower. This means the borrower has to short the stocks of 1 lakh then, stock exchange can block 1.25 lakh amount of borrower.

If the stock rises more than 25% in a month position of a borrower is squared off automatically and lender gets the premium and interest after squaring off.

Stock lender risk

If the stock or security shows the exponential rise in value within the SLBM tenure and borrower fails to give delivery of stocks then lender has to sell his stock forcefully and 125% amount of stocks value will be credited in lender's account. 

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Click here to view :-

 1. Types of stocks 

 2. Technical analysis 

 3. Correction analysis 

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