Buying and holding stocks has long been considered a foolproof way to create wealth. All you need is to buy shares in good companies, hold them for years, and you stand to benefit from capital appreciation and dividends. While buy and hold will always be a key aspect of long-term investing, today, there are other avenues of generating income.
Apart from buying stocks, you could rent stocks out from the Stock Lending and Borrowing Mechanism (SLBM) or even generate income from shares already in your portfolio. Such approaches can help investors leverage their holdings much better, without letting go of ownership.
Let’s understand why investors are turning to stock renting along with ownership.
5 Reasons Investors are Exploring Stock Renting Alongside Ownership
While owning stocks remains an important part of long-term investing, there are other strategies to earn from the stocks you already own. These methods may include renting stocks out or using covered calls, which is explained below:
1. Generate Additional Income From Idle Stocks
Many investors have shares in good companies that they hold for years to enjoy long-term appreciation. These shares are not active during these years.
Through the SLBM, you could lend the shares that you are holding in good companies for use by traders interested in shorting the stock.
They will pay you a fee for lending them your shares. Instead of just holding, you will earn money from your idle shares while holding on to them.
2. Continue Receiving all Corporate Benefits
You would not have to forego all the benefits of holding a share even when you are lending it.
For shares lent through SLBM, a system that is governed by an exchange. The clearing corporation, you can continue to receive corporate actions, like dividends, bonus shares, stock splits, and other such events, as applicable.
In fact, you could make income from lending your shares and continue to enjoy their long-term appreciation.
3. Secure and Regulated Framework
The biggest reason why stock lending and borrowing have found favour with investors is that it is done within a secure and regulated framework managed by a clearing corporation.
The borrower needs to offer collateral over and above the value of the shares they wish to borrow.
Collateral can be cash or approved securities that exceed the value of borrowed shares in the required proportion. This provides assurance and security to lenders.
4. Earn Premium Income Through Covered Calls
Investors can also earn additional income on shares they already own by selling covered calls. In a covered call, the investor sells call options on a specific number of shares he owns.
The premium received from the call option acts as income, without the investor parting with his ownership of the shares for now.
For an investor who doesn’t expect the share price to move up much, it can be a good way to earn income.
5. Make Sideways Markets More Productive
It is not always the case that every stock continues to appreciate. Even fundamentally strong companies can trade within a narrow price range for months or even years.
Instead of waiting for prices to rise, investors can lease their shares through the SLBM or sell covered calls to generate additional income.
A reliable trading platform makes it easier to access these strategies. They help investors earn lending fees through SLBM or collect option premiums while continuing to benefit from their existing portfolio.
Exploring New Ways to Make More From Your Portfolio
Owning good stocks and holding for the long term is an important part of wealth building, but there are also opportunities to generate more income without relinquishing ownership.
Stock lending via SLBM or selling covered calls could help investors earn from stocks even when they are sitting idle or consolidating.
Understanding these mechanisms thoroughly can go a long way in optimising your portfolio for better returns in any market cycle.
