What is SLBM in the Stock Market | What is Stock Lending And Borrowing Mechanism
Today we will discuss the securities lending and borrowing mechanism. It is abbreviated as SLBM.
This mechanism governs the lending and borrowing of stocks between two demat account holders. In other words, you can lend your shares to anyone or borrow from anyone. This system was introduced by SEBI in 1997 with the goal of increasing liquidity in the stock market. Today, small investors are a part of this mechanism and benefit from it. However, many retailers are unaware of this mechanism, and it is our responsibility to inform you about it. In many countries, this mechanism is classified as an OTC (over-the-counter) product.
That is, if you borrow stock from someone or lend stock to someone, or if there is any kind of problem in the transaction, the responsibility will be solely on you. If you live in India, you will not face such problems. Because every transaction through SLBM is handled by the settlement guarantee stock exchange itself, which is why our country is so great. We are aware that things may not have cleared completely. Because this is a new concept for you. However, there is no need to be concerned. Let us use an example to explain it.
Explain with example
So, let’s say a Tata share is worth a hundred rupees today, you don’t own any, and you don’t want to buy any more. But you believe that in the next three months, its rate will fall to 80, or that you can make a lot of money by trading it in the future. However, the main issue is that you do not wish to purchase shares. In this case, find a lender through a broker who can lend you Tata shares. Assume you have a lender. You borrowed 1000 Tata shares from him. For which you must pay a monthly share rent of $5.
We’re going to tell you an example of what we’re talking about. As a result, the share rent is to be paid at a rate of rupees 5 After borrowing, you must immediately sell those shares at the same price. You will receive 1000 x100, 1,00,000 rupees in cash as a result of this. Now you must sit quietly until the rate reaches the level you set. When the rate reached rupees 80, you purchased 1000 shares and returned your lender. That is, you sold it for Rupees 1,000,00 bought it for 80,000, and profited directly by 20,000. The lender, on the other hand, received 5000 as a fare. So, hopefully, this example has helped you understand.
What is SLBM? How does it work?
Let us now discuss SLBM’s profit. The securities lending and borrowing mechanism, as you can see, is profitable in every way. Whether viewed from the lender’s or borrower’s point of view. So let’s start with the lender’s advantages. Assume you own 100,000 shares of a company and have lent your 100,000 shares to a trade via slbm. You will now reap a variety of benefits. As if you were receiving a fixed fee, interest fare You can also lend shares that are not performing well in the long run. You can earn a lot of money by lending it out.
During the lending period, you will continue to receive your stock dividends and bonuses. There are no fees or charges associated with lending. Because the entire transaction is governed by the NSCCL and ICCL, you face no financial risk. Borrowers now have an advantage. Borrower borrows a stock for a variety of reasons. However, it can have numerous advantages, such as for his trading strategy or financial strategy. You can trade in the market without risking any money. You can also borrow only one share if you wish. Borrowing is not restricted. Borrowing allows you to sell undervalued stock when it is overvalued.
Traders frequently do this when a future discount is available. Shorting the stock by buying in the future And then they have to borrow the shares they have shorted from them. People are earning a lot of money in this manner, which is why it is said that education is very important, and where there is education, there is never a problem. So keep learning and keep earning.
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