No, you cannot short stocks on Freetrade, but you can still earn money from other people going short as the commission-free share trading platform has a share lending for its customers.
Freetrade’s share lending program allows its users to lend out their eligible shares held in either a GIA, a general investment account, or SIPP, a self-invested personal pension, in order to earn additional income.
If you opt-in, Freetrade may lend your shares to vetted borrowers. You’ll earn 50% of the fees generated, whilst Freetrade retains the other 50%.
What is the stock loan market?
The stock loan market is an important liquidity provision tool and it’s a part of the market infrastructure that retail traders wouldn’t normally see.
Long-term holders of stocks lend those stocks out to other traders for a fee or borrowing charge, or, in this case, in exchange for high-quality collateral such as government bonds.
The loan of stock allows the other parties to settle outstanding trades, and once those trades are closed, they can then return that stock to the lender.
Why is stock lending so important?
Stock lending supports short sales and market making, and without it, we wouldn’t have the continuous liquid markets that we enjoy today.
Stock loan and borrow deals usually take place between institutions, with both parties, often transacting anonymously, through a specialist intermediary.
However, more retail brokers are now enfettering the space to aggregate and lend out their client’s stock holdings, to provide both themselves and their customers, with an additional source of revenue.
What are the risks if any?
The primary risk is that a borrower might fail to return your shares. However this is an unlikely event and, Freetrade will hold government bonds as collateral and would cover any shortfall.
Can I opt out of the program?
Yes, you can opt in or out anytime through your profile settings in the Freetrade app.
What happens if a borrower doesn’t return my shares?
Freetrade will sell the collateral it holds on your behalf and repurchase your shares. If the collateral is insufficient, Freetrade will make up any difference.
Are there any other considerations?
Yes, there are a few You won’t be able to vote any shares on loan and you may receive manufactured dividends, which could have different tax treatment.
Short selling supported by stock loans may also put downward pressure on the prices of the shares that are being lent out.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
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