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Guide To SLBM (Stock Lending and Borrowing Mechanism)

Stock Lending and Borrowing Mechanism

What Is SLBM?

SLBM allows investors to lend or borrow shares from other market participants. The lending and borrowing platform provides a viable alternative to the derivatives market for safeguarding one’s assets against risk.

An SLBM transaction may involve securities for which there are available derivatives on the market. The Sebi allows stock loans for a maximum of one year.

Why Do Traders Do Stock Lending & Borrowing Mechanism?

A multitude of reasons exists for stock lending and borrowing.

If you borrowed shares from another investor, you must repay the lender with interest, just as if you had got a loan from the bank. In addition to the type of collateral, the loan term is also crucial to the interest rate. Rather than being fixed, the interest rate on these loans varies according to market conditions.

Compared to more complicated options and futures contracts, SLBM is a safer alternative for short-sellers. In India, the SLB platform allows for the borrowing of around 200 stocks.

SLB can also access shares that are not traded in derivatives markets or have low futures exchange volumes.

How Does It Work?

Consider the circumstance that your stock price forecast is bleak. You have the opportunity to lend any bought SLB shares. You may purchase them at any time for a discounted price. The profit is the difference between the item’s selling and buying prices minus the interest rate.

Assume that Company A’s current share price is Rs. 1000. You determine that lending 100 shares of A for Rs. 100,000 would be beneficial.

When A reveals quarterly earnings are below estimates, the stock price drops to Rs. 900. One hundred shares of A are now available to buy for 90,000 rupees.

You then return the borrowed Company A shares to the lender, who accepts the same number of shares despite the massive reduction in the share price.

The Rs. 10,000 discrepancies are maintained (minus interest and other costs). You make a profit in the end.

If the price of the same 100 shares rises, on the other hand, you earn a huge profit as a borrower.

Benefits For Lenders

Lenders are investors who bought shares intending to hold them for a long time but now have them sitting idle in their Demat accounts.

Long-term investors like mutual funds and insurance firms are the primary lenders to small and medium-sized businesses (SMEs) worldwide. Additionally, Retail investors, HNI, banks, insurance firms, and mutual fund companies are among the lenders.

For Instance:

It provides value to a portfolio that could otherwise stay static. Consequently, if you possess 1,000 Infosys shares and desire to retain them for an extended period, you may consider lending them out if there is a market.

Knowing that NCL would guarantee my loans, you could charge more considerable lending charges and gain a better return percentage.

Imagine what would happen if you could rent out all of the gold jewelry in the bank safe deposit box beginning tomorrow for a fee, with the return of the goods guaranteed by a firm like NCL.

Benefits For Borrowers

Short-sellers, or traders who seek to sell shares they don’t own, make up the bulk of SLB borrowers. The borrowers are cash and derivatives arbitrageurs, short-sellers – notably long-term shorts (market makers), and retail traders. Reasons to borrow through SLBM

  1. Stock price arbitrage between two exchanges
  2. Reverse arbitrage is when futures trade at a discount to stock
  3. Covering short positions to avoid settlement failure
  4. Mispricing in options
  5. Stock arbitrage and hedging methods

In either case, a lender may secure SLB based on stock ownership. Best Trading app in India could help you in the process.

For Instance:

Tata Motors’ current availability of multiple reverse arbitrage options is a basic illustration. The stock is now trading at Rs 400, with the futures contract at Rs 394. Although it should cost more, this is a Rs 6 savings. Tata Motors require a minimum order quantity (lot size) of 1,000.

An arbitrageur might use SLB to borrow 1 lot. We hope you liked reading this blog and will put the lessons into practice as much as possible. If you want to start the SLBM process, contact the Best broker for trading.

For Instance:

Tata Motors’ current availability of multiple reverse arbitrage options is a basic illustration. The stock is now trading at Rs 400, with the futures contract at Rs 394. Although it should cost more, this is a Rs 6 savings. Tata Motors require a minimum order quantity (lot size) of 1,000.

 

 

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