If you're an investor with Robinhood, you may have heard of Stock Lending.
This program allows you to earn extra income on the stocks you already own.
Here's what you need to know to get started.
When you lend out your stocks, you earn interest on the loan, which is paid to you on a monthly basis.
Robinhood facilitates the lending process and matches borrowers with lenders.
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To be eligible for Stock Lending, you need to have a total account value of at least $5,000, reported income of at least $25,000, or some trading experience.
If your account is flagged for pattern day trading, you are not eligible for Stock Lending until you are no longer flagged as a pattern day trader.
If you are eligible for Stock Lending, you can enable it through the app or website.
Once you enable Stock Lending, Robinhood will begin searching for borrowers for your stocks.
At this time, you cannot select which stocks to lend out.
If you enable Stock Lending, your entire equities portfolio will be considered for lending.
If your stocks are loaned out, you can still sell them at any time and realize gains or losses as you would otherwise.
Whole shares of fully paid securities, including stocks, ETFs, and ADRs, are eligible for Stock Lending.
Securities purchased on margin and fractional shares are not eligible.
If you have fractional shares of a security, such as 1.5 shares of BCDE, only one share can be loaned out through Stock Lending.
When Robinhood borrows shares of a particular stock from your account on a given day, you earn interest on the loan.
You will earn either:
This would be your share of the rebates Robinhood earned for that stock on that day.
Your income from Stock Lending will vary from month to month.
You're more likely to earn money when there's high market demand and low market availability for the stocks you own.
You maintain economic ownership of your stocks and can sell them at any time.
The value of your stocks isn't fixed to the price based on which they're loaned and may go up and down.
If you decide to sell your shares, you'll realize any gains or losses on them.
Stocks on loan can still earn dividends.
The resulting amounts are just paid out and taxed differently.
If your stocks are on loan, you'll still receive cash equal to any dividends earned, which will be passed to you from the borrower through Robinhood.
These payments are often referred to as "cash in lieu of dividends" or "manufactured dividends."
Manufactured dividends will be labeled on your brokerage account statements as "Manufactured Div." instead of "Cash Div."
The other big difference is that while dividends are taxed as capital gains, manufactured dividends are taxed as ordinary income.
This means that the tax rate applied to them will be your ordinary income tax rate.
While Stock Lending can provide an additional source of income, it’s important to understand the risks involved.
It’s also important to note that enabling Stock Lending may impact your tax situation.
As mentioned earlier, manufactured dividends are taxed differently than regular dividends, so you may need to adjust your tax strategy accordingly.
It’s always a good idea to consult with a tax professional if you have questions about how Stock Lending may impact your taxes.
Stock Lending can be a useful tool for generating extra income from your investments, but it’s important to understand the risks involved before enabling it.
While your loaned securities are protected by cash collateral, there is still a risk of default by the borrower and a potential decline in the value of your loaned securities.
If you’re interested in enabling Stock Lending, make sure you meet the eligibility requirements and understand how it works before enabling it.
Keep in mind that your income from Stock Lending may vary from month to month and that manufactured dividends are taxed differently than regular dividends.
With a little research and careful consideration, you can decide if it’s the right choice for you.
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