Investment is the process of enhancing existing funds. Everyone wants to increase their existing fund to bring symmetry between income and expense. However, to balance income and expenses, a person must manage his finances and concentrate on savings.
After purchasing securities or investing in shares, there is a high chance of profit from the principal investment. Although the share market is associated with risk, it is entirely up to the investor how much risk he can take. However, even if an investor is willing to accept low risk still there is chance of getting a good profit.
Whenever you find different means of investment, certainly everyone will suggest you invest in securities. It is a multi-income generator. One can even earn money by lending securities.
What is security lending?
We all have a fair idea about lending money. Now in the money lending process, there are two parties. One is the lender, and the other is the borrower. Here the medium of lending revolves around money. But when it comes to the matter of security lending, the process is quite different.
Similar to the process of lending a person who holds securities and shares used to lend his existing holdings to another person who has a good portfolio. By lending securities, that investor generally ensures extra profit. Usually, individuals do not take part in such amalgamation.
Instead, the best usage of this practice is found between institutional holdings and government holdings. But nowadays, many individual investors would like to take part in security lending. So, if you are an enthusiastic investor and want to earn more than now, you must read this entire blog to gather knowledge about it.
Process of security lending
It may seem that two parties, such as lender and borrower, complete the entire lending process, but it is more than that. The whole process of security lending revolves around more than two investors. Generally, brokers and dealers take part in that entire process.
Moreover, the process is different for government institutions and individuals. If a person wants to lend his securities, he needs to start filling up a form as an individual investor. After that, the investor may need to hire a broker or approach his exiting broker to publish the security on sale.
The investor needs to pay 1% of the total interest earned out of lending to hire a broker. Within few days, borrowers will approach that lender to take those securities. After selecting a borrower, that lender needs to hand over all the rights and title of the lent share.
However, it does not mean that the lender has handed over all the rights for a long time. Besides, if that investor wishes, he can quickly sell those lent securities at any time. Usually, the interest rate is pre-set while lending the securities, and there is no question of a floating rate.
Pros of lending securities
- Overachievement of interest
Every investor always thinks to maximize their income. Well, it is the true nature of an investor. In that case, by lending securities, the overachievement of interest is reasonably assured. On the one hand, the lender will get money by investing money in valuable shares. On the other, it will also make him rich by lending securities.
When an investor lends securities, he signs an agreement for a year or more. Throughout the entire period, the lender enjoys extra income from the borrower. So, one must lend some of his existing securities.
- Ensures profit for lenders
When a lender lends some of his existing securities, it will ultimately add a profit margin to his portfolio. It has been observed in many cases that many times a lender also becomes a borrower. The only reason for such a roundabout process is shuffling securities.
Generally, a lender is always known as a prominent investor who possesses a mixed portfolio. There are to sustain the profitability. There requires some interchange. Therefore, lenders used to lend less profit-making shares instead of adding something more profitable.
Cons of security lending
It has been observed that although the primary purpose of lending is to gain more profit, frequently, lenders suffer for the loss of profit. However, to compensate for the loss amount, one can easily apply for small cash loans for unemployed people in Ireland. This type of loan is easy to get, and quickly, an investor can compensate.
- Defaulter generates loss
The only purpose of lending security is to make more money. Generally, the source of extra income is assured only when the borrower can utilize that borrowed security. If that borrower failed to handle that lent security, then the problem arises.
Being unable to earn money, he fails numerous repayments. Now, this can become the steady reason for loss for the lender. So, by any chance, the borrower cannot handle the security properly, and then a financial crisis occurs.
- The wrong decision for mitigating short term need
It is a new trader, and it is pretty challenging to understand how the share market works. Therefore, without gaining complete knowledge, if you lend even one of the securities, you are about to make a big mistake. An investor should know that such a lending procedure is not at all suitable for short-term fund requirements.
So, before choosing a security lending option, make sure you know all about it properly unless the lender will face a huge loss that is unmatchable.