FPSL stands for Fully Paid Securities Lending. It sounds very complicated, but don’t fret!
We’re going to break down the meaning of FPSL in this article to give you all the insight you need to understand the complicated world of the stock market.
What Does Fully Paid Securities Lending (FPSL) Mean?
The goal of FPSL is pretty simple, although it sounds very complicated. It refers to making a profit off existing security that you have, for instance, stock in your portfolio.
When a customer agrees to FPSL, they are giving out their permission to the broker to lend out their shares (see also ‘How To Turn Off Share Lending Webull’).
When the broker has permission to lend out their shares, other financial institutions who want to borrow them in the short term, can.
This can also settle trades. When your brokers lend them out, the borrowers pay a fee to the broker which is then shared with the customers – this is the benefit of allowing your broker to lend out your shares.
If this happens, customers can indirectly benefit from this situation, although securities lending most commonly occurs between institutions.
Stocks that are more popular or are in short supply are more likely to be borrowed.
What Is A Real-Life Example Of FPSL?
When you are renting out your house, you will be gaining money from an asset that you already own. You can also still sell this house, or move back into it and live in it.
This is similar in the world of FPSL in stocks. Securities lending means that you can earn an income on the stocks (see also ‘How Much Can You Make From Stocks In A Month?‘) that you already own, but you still own them and can sell them at any time.
What Is An Example OF FPSL In Stocks?
Let’s say you’re a long-term investor in a stock that is worth $1000.
You might decide that you want to earn some income on this money.
If you want to earn passive income, without having to do anything, FPSL is the way to go about this.
All you will need to do is check that you are eligible for FPSL and then give your broker permission to lend out your shares.
Your broker will then do this, making a loan of your stock to an institutional investor.
From this, they will earn, on average, a 10% annual earnings. In this case, it would be around $100.
You will then get a cut of this earning, which varies from broker to broker.
This means that you will earn money from this stock while it is being lent out. You will still own this stock.
The real life example above may help you to understand this more easily.
Benefits For FPSL Customer
There are many benefits of FPSL for the customer.
Brokers do gain more than everyone else in FPSL. However, customers also gain an extra source of income.
It benefits more than just the broker! Why not earn an income off of your existing stocks?
Securities lending allows short-selling to happen. Securities lending is demand-driven and it is more likely that your stock will be in demand if there are not many available.
Easier to borrow securities are more lucrative for the broker than securities that are in short supply as they are hard to borrow.
FPSL is a great way to earn a passive income without putting any effort in yourself.
You may as well give it a go so that you can boost your income! You will still be able to withdraw this at any time and sell your stocks.
Tradeoffs For FPSL Customers
There are many tradeoffs for FPSL customers. These include:
- Customers lose the right to take part in voting for shareholders on any of their loaned securities. This is true during the borrowing period.
- Any dividends that are earnt on the securities are taxed as ordinary income. This means they are likely to have a higher tax rate.
- Thirdly, customers will lose their SIPC insurance on the securities that are being loaned out. This means that if the broker goes out of business, SIPC won’t cover any losses. However, in order to make up for the fact that SIPC won’t insure stock that is lent out, the broker usually holds enough cash in case they go out of business meaning they can pay back the money of the loaned securities. This is usually held at a third party institution.
You do still own your shares if you take part in FPSL. You can still sell your shares at any time, and you can recall the loan whenever you like.
However, technically, when your security is loaned, you temporarily transfer this to the person who is borrowing it.
The borrower will have the shareholder voting rights for these shares as well as the SIPC insurance.
While this is the case, you will still have all of the economic control over these shares. They will be visible in your account and they are able to be sold at any time.
How Do I Participate In This?
Your broker will likely offer you FPSL when you sign up. You will have to agree to this in order to be able to participate.
You may not be eligible for FPSL, but each broker’s eligibility criteria are different.
You will often need to have hundreds of thousands of dollars on your portfolios in order to take part, but sometimes you won’t need this many.
Check all of this with your brokers as they often have different split rates.
You should also consider the percentage of loan fees that are received by the broker and how much you will get. Some won’t share very much of the earnings, whereas others will share half.
You don’t have to participate in FPSL if you don’t want to. You will need to actively agree to take part.
Now that you understand what FPSL means in stocks, you should be able to consider if this is something that you are interested in, or are able to take part in.
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