Fidelity and Schwab will pay you for stocks you already own | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

You have probably seen the popup in your brokerage account at least once in the past year. Fidelity or Schwab is telling you that free money is sitting on the table, just waiting for you to claim it.

The pitch sounds almost too convenient to ignore, especially if you are a buy-and-hold investor with a long-term horizon. Your shares sit idle for months or years at a time, so why not put them to work earning extra income?

Stock lending programs are not new on Wall Street, but major brokerages have started marketing them aggressively to everyday retail investors. Before you opt in, you need to understand exactly how the money gets made and who really benefits from the arrangement.

The answer is more nuanced than the notification suggests, and the payoff may surprise you in more ways than one.

How stock lending works and who is borrowing your shares

Stock lending, also called securities lending, lets you temporarily loan shares you own to your brokerage in exchange for a fee. Your broker then relends those shares to institutional investors, hedge funds, or traders who typically need them to execute short sales.

You maintain full economic ownership of your shares the entire time, and you can sell them at any point without restriction. The brokerage posts cash collateral equal to at least 100% of the loaned securities’ market value as a safety net for you.

Borrower fees typically range between 0.3% and 3% of the value of the stock that is borrowed, according to U.S. News & World Report. Your brokerage collects that fee, keeps a portion, and passes the remainder along to you on a monthly basis.

“Many popular brokerage firms have programs where owners of securities can lend those securities to short sellers,” said Stephen Henn, DLA Piper’s managing director of artificial intelligence and data analytics.

The lending fee accrues daily, and the rate fluctuates based on supply and demand for each individual security in the lending market. High-demand stocks that are heavily shorted will earn you significantly more than stable blue-chip shares that are easy to find and borrow.

Fidelity and Schwab run their lending programs very differently

Both Fidelity and Charles Schwab offer fully paid lending programs, but their eligibility requirements and revenue structures are not identical. If you hold accounts at both firms, it pays to understand the differences before you sign up for either program.

Fidelity requires a lower balance but does not disclose its exact revenue split

Fidelity requires a minimum account balance of $25,000 in each brokerage account you wish to enroll, according to Fidelity’s program page. The interest rate you earn is variable, determined by borrowing demand, short-selling activity, and current market conditions.

Enrollment is digital and available to most individual brokerage accounts, including traditional and Roth IRA accounts at Fidelity.
Fidelity serves as your direct counterparty on all loans and may relend your shares to third parties at higher rates.
Collateral is held in cash or cash equivalents at a third-party custodial bank that is fully independent of Fidelity.
Fidelity attempts to return your shares before dividend record dates to preserve qualified dividend tax treatment for you.
If shares cannot be returned in time, Fidelity credits taxable accounts with a 26.98% adjustment on the qualified dividend portion.

Schwab offers a clear 50/50 split but requires a much larger account balance

Schwab’s minimum threshold is considerably higher at $100,000 in total household assets, according to Schwab’s program details. Schwab has operated this program since 2005 and reported to the SEC in 2022 that roughly 25,000 clients were actively participating.

Schwab splits lending revenue 50/50 with participating clients, a structure that is clearly disclosed upfront in its program terms.
Cash collateral is posted at 102% of the market value of securities on loan, providing an extra layer of financial protection.
There are no trading restrictions whatsoever on your loaned shares; you can sell at any time without penalty or processing delay.
Employer-sponsored retirement accounts like 401(k) plans are not eligible under federal ERISA rules, so keep that in mind.

The income you can realistically expect from lending your shares out

This is where the marketing and reality start to diverge in a meaningful way for most everyday retail investors and their portfolios. Your earnings depend on which specific stocks you own, the borrowing demand, and how long your shares stay on loan.

Stocks that are heavily shorted or in limited supply will command higher lending rates and generate more meaningful income for you. Broad-market index funds and large-cap blue-chip holdings that are easy to borrow will typically earn you very little each month.

More Dividend stocks:

One investor on the Bogleheads forum reported earning about $55 per month from Fidelity’s program on a high-six-figure Roth IRA portfolio. Another reported earning just $0.04 in a full year on leveraged ETFs with a broker that only passed through 10% of revenue.

Money expert Clark Howard has characterized the opportunity concisely for retail investors: the income will not move the needle unless you hold a very large portfolio. Stock lending is legitimate, but you should temper your expectations before you sign up for any program.

The biggest gains from stock lending usually come from hard-to-borrow securities, not the typical long-term holdings in most portfolios.

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The tax consequences and hidden risks you should evaluate before enrolling

Stock lending is marketed as low-risk, and in most cases that description is fair from a credit risk perspective alone. Your broker posts collateral, and you can sell your shares at any time without restriction or delay in processing your trades.

Shares on loan lose SIPC protection that normally covers your brokerage account

Shares that are currently on loan are not covered by the Securities Investor Protection Corporation, according to Fidelity’s disclosure documents. If your broker were to default, you would rely on the posted collateral rather than on federal SIPC insurance to recover your assets.

The probability of a firm like Fidelity or Schwab failing is extremely remote, but it is a real legal distinction that is worth knowing. You are trading federal insurance protection for contractual protection backed by collateral held at a separate custodial bank.

Cash-in-lieu payments can cost you more in taxes than the lending income you earn

When your shares are out on loan over a dividend record date, you receive a substitute payment instead of the actual qualified dividend. These cash-in-lieu payments are taxed at your ordinary income rate, not the lower qualified dividend rate you would normally receive.

For investors in higher tax brackets, this difference can exceed the lending income you earned from those same shares. Fidelity addresses this by attempting to return shares before record dates and offering a 26.98% annual credit adjustment for taxable accounts.

Schwab does not publicly disclose the same type of automatic tax adjustment mechanism for its participants in that specific format. If you hold dividend-paying stocks in a taxable account, this distinction should factor heavily into your enrollment decision.

Your shareholder voting rights transfer to the borrower while shares are on loan

When your shares are out on loan, voting rights transfer to the borrower for the full duration of that particular lending transaction. If a proxy vote matters to you, you must contact your broker in advance and request a recall of the loaned shares before the record date.

Fidelity states it will attempt to return shares on a best-efforts basis, but there is no absolute guarantee the recall will be completed in time for every proxy vote that you want to participate in during the lending period.

Situations where stock lending makes the most practical sense for you

Stock lending is not a one-size-fits-all decision, and you should evaluate your own portfolio composition carefully before enrolling in any program. The right choice depends on your account type, the kinds of stocks you hold, and your overall tax situation.

Best candidates for stock lending programs

Tax-advantaged accounts like Roth IRAs, where the cash-in-lieu tax issue is completely irrelevant to your overall bottom line and net returns
Portfolios that hold small-cap, mid-cap, or niche ETFs that tend to be in higher borrowing demand among short sellers in the market
Long-term buy-and-hold investors who do not need to exercise shareholder voting rights on a regular or particularly frequent basis
Investors who already hold more than the minimum required balance and are comfortable with the posted collateral structure and its protections

Situations where you should probably skip enrollment altogether

Taxable accounts loaded with dividend-paying blue-chip stocks, where the tax cost of cash-in-lieu payments may exceed your total lending income.
Portfolios made up primarily of broad-market index funds like the S&P 500, which are easy to borrow and generate minimal lending fees.
Investors who actively vote on shareholder proposals and do not want the hassle of recalling their loaned shares before each record date.
Anyone who is uncomfortable with the fact that SIPC protection does not apply to shares that are currently out on loan at any given time.

How to enroll: practical steps to take before you opt into stock lending today

If you decide stock lending fits your situation, the enrollment process at both Fidelity and Schwab is straightforward and entirely digital. Fidelity requires you to complete an online enrollment and sign a Master Securities Lending Agreement, according to its program page.

At Schwab, eligible clients can enroll through the Securities Lending Fully Paid dashboard within their online account portal, per Schwab’s FAQ page. Some accounts that do not qualify for online enrollment can submit a paper enrollment form through the Secure Message Center.

Steps to take before you click the enrollment button

Review your portfolio carefully and identify which holdings are most likely to be in demand from borrowers at the current time.
Determine whether your account is a taxable brokerage, a Roth IRA, or a traditional IRA and understand the unique tax implications of each.
Read the Master Securities Lending Agreement in full, since it governs your rights, your risks, and the full collateral arrangement.
Understand that enrollment does not guarantee your shares will be borrowed, since demand fluctuates based on market conditions every single day.
Monitor your lending income monthly and compare it to any additional tax liability created by cash-in-lieu payments on your dividends.

How other brokerages compare on stock lending revenue splits and account minimums

Fidelity and Schwab are not the only brokerages offering stock lending programs to retail investors at this point in the market. Interactive Brokers offers a 50/50 revenue split with a $25,000 minimum balance, according to NerdWallet’s analysis.

Robinhood also offers a stock lending program, but it keeps a significantly larger share of the revenue at approximately 85%, passing only about 15% along to you. That is a meaningful difference compared to the 50/50 split you would receive at Schwab or Interactive Brokers.

Some brokerages, including M1 Finance, have faced criticism for automatically enrolling customers in securities lending programs without adequate upfront disclosure. Always confirm whether your broker requires you to opt in or whether you are already enrolled by default today.

Stock lending can generate a modest but real stream of extra income for the right investor in the right account type and with the right portfolio. The key is going in with realistic expectations and a clear understanding of the trade-offs involved in the arrangement.