Stock loan, also called securities lending, is the function within brokerage operations that lends shares of stock (or other types of securities, including bonds) to individual investors (retail clients), professional traders and money managers to facilitate short sales.
To settle the trade, the short seller must borrow the security in question for delivery to the buyer. Since most of the stock shares held on behalf of brokerage firms for their clients are registered in the name of the firm (known as "street name"), these firms can draw upon this pool of shares to lend out. The interest charged on stock loans normally is the same rate that the firm charges on margin loans. Since the effective cost of funds on the shares thus loaned out is zero, because clients are not paid interest by the firm for depositing their shares with the firm, stock loan departments tend to be extremely profitable.
Eventually, the borrower of stock must purchase the shares in question and deliver them to the firm which made the loan, to close it out.
In 2012, European securities regulators floated a proposal that would require asset managers to turn over any profits from stock lending activities to investors. Currently, investment funds, like securities brokerage firms, typically keep such profits for themselves and do not distribute them to account holders.