Marijuana stocks are some of the most sought after and shorted stocks on the markets. Short-sellers are digging deep down into their pockets to get their hands on these hot marijuana stocks. As a result, investors who own these stocks may be able to collect fees from lending out their shares.
Not long ago, stock lending was purely institutional. However, more brokers are permitting their clients to participate for a fee. Different brokerages have different names for their programs, ranging from “fully paid lending” to “stock yield enhancement program”.
How does it work? First, a short-seller must borrow the shares from an investor who owns them. If there is more of a demand to borrow a stock than a supply, the fees can reach as high as 100 percent of the stock’s value on an annual basis. Those who own these shorted shares can cash in by collecting a fee by lending them out.
Keep in mind, lending out your shares isn’t entirely free of risks. One example would be if your brokerage firm were to go out of business, you may not be able to recover the shares that were lent out. But, if you are familiar or invest in any mutual funds or ETFs, you may already be participating in securities lending and not even know it.
Two marijuana ETFs are Canadian-based Horizons Marijuana Life Sciences Index ETF (HMLSF) and U.S.-based ETFMG Alternative Harvest ETF (MJX). Both exchange-traded funds lend out their shares to generate returns for their investors.
Not every stock is worth lending, and it doesn’t make sense to lend out a dividend-paying stock that is held in a taxable account. This is what places marijuana stocks into a favorable category, as most marijuana stocks do not currently pay out dividends.
When a dividend-paying stock is lent out, the borrower is required to pay you payments instead of dividends on the shares. These payments are taxed as ordinary income rather than being taxed at a lower rate for qualified dividends. Some brokers hike up stock lending fees to cover the tax difference, and some don’t.
Some people are strongly against the idea of lending out their shares to help someone bet against them, and then, there are those who favor being compensated for taking a risk on an investment. Which type of person are you?