Let's say you're a manager at an index tracking pension fund. You're likely to be holding shares in the index at a proportion similar to the index weightings. And you're likely to hold most of them for the long term as you're required to track the index.

The key phrase is long term. It doesn't really matter to you whether or not a particular share price goes up or down in the short term as you aren't interested in selling.

So what you can do is lend the stock to a shorter. You enter into a contract where you give them X shares of a stock and they're obliged to give you X shares back in a few days regardless of any price move. They're also obliged to pay a fee for the service.

The net effect is that, instead of having X shares, you now have X shares and the fee.

The major risk for you is that they don't give you the shares back. That's why these contracts usually have collateral agreements such that, if they renege, you haven't lost out by much.

You get paid for providing the shares.

So if I had one million shares and thought the stock was going to go up, I could make some extra cash by lending it to people and making them pay me for the right.

The borrower pays interest to the lender.

They are paid, of course.