In the world of investing, the online brokerage platform Robinhood has made a significant impact with its user-friendly interface and commission-free trading. Recently, Robinhood expanded its offerings in the U.K. by launching a share lending program, allowing consumers to earn passive income on stocks they own. This move is part of the company’s strategy to grow its market share abroad and provide innovative financial products to its customers.
Share lending, also known as securities lending, is a practice where investors can lend out stocks they own to interested borrowers in exchange for a monthly fee. This process is akin to renting out your stocks for extra cash, with the borrower using the stocks for trading activities such as settlements, short selling, and hedging risks. Despite lending out their shares, investors still retain ownership and can sell them at any time, realizing any gains or losses on the stock.
Robinhood’s share lending program in the U.K. treats shares lent out via the app as collateral, with the company receiving interest from borrowers and paying it out monthly to lenders. Additionally, customers can earn cash owed on company dividend payments, typically from the borrower rather than the issuing company. The platform allows customers to sell lent stock at any time and withdraw proceeds from sales once the trades settle, providing flexibility and liquidity to investors.
While share lending is not uncommon in the U.K., it is still considered a niche product with limited availability. Several firms, including BlackRock, Interactive Brokers, Trading 212, and Freetrade, offer securities lending programs in the U.K., with most passing on 50% of the interest to clients. In contrast, Robinhood offers lenders on its platform a 15% interest rate, providing a competitive option for investors looking to earn passive income on their stocks.
Despite the potential risks associated with share lending, such as borrowers defaulting on their obligations, Robinhood aims to mitigate these risks by holding cash equal to the value of loaned stocks at a third-party bank. This ensures that customers are covered in case of any unforeseen circumstances. The company keeps cash collateral in a trust account with Wilmington Trust, National Association, through JP Morgan Chase & Co acting as custodian, providing an added layer of security for investors.
Overall, Robinhood’s share lending program in the U.K. represents a new opportunity for retail investors to put their investments to work and earn passive income. By offering innovative financial products and expanding its presence in international markets, Robinhood continues to disrupt the traditional brokerage industry and provide accessible and user-friendly investment options for customers.
