Remargining

  

Categories: Trading, Credit

You buy $100,000 worth of shares of Titanic Insurance Limited. You spent $50,000 of your own money and $50,000 that you borrowed on margin. You are required to maintain a minimum of $50,000 to cover any potential margin call.

Unfortunately, the stock sinks. It sinks bad. Your shares are now worth just $40,000...less than the minimum margin requirement.

Time for a little remargining.

The process involves providing more cash (or contributing more stock) in order to get your account above the minimum level. So you move $15,000 from your savings account, bringing your total up to $55,000...above the required floor.

Related or Semi-related Video

Finance: What are margin account, margin...1 Views

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Finance Allah shmoop what is a margin account I think

00:08

the bank of you you have one hundred grand in

00:11

stocks saved in a margin account set up at your

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kindly loving Morgan Stanley or Schwab brokerage Lots of lawn

00:18

mowing and rich Uncle dying went into getting that hundred

00:21

grand Bessie Mae dies You need Bessie Mae two point

00:25

Oh the kind with round wheels this time Yeah she'll

00:28

cost twenty five grand You don't want to pay the

00:30

fifteen percent interest that the auto dealer offers you generously

00:34

loaning you the money And if you sell twenty five

00:37

grand worth a stock well you'll pay almost ten thousand

00:39

dollars in taxes so you'd have to sell something closer

00:42

Duff forty grand to net the twenty five grand after

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tax And wow that's expensive for Bessie Mae Two point

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Oh with the round wheels and air conditioning and windows

00:53

that actually work So you really don't wanna have to

00:55

sell stock The vastly cheaper solution is to borrow money

00:59

from yourself All right Well how do you perform this

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magic Well your brokerage account is set up as a

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margin account That is when you set it up You

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checked and signed all the boxes that claimed you knew

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what you were doing were of sound mind when you

01:14

signed and you realize that there's a fifty percent margin

01:17

limit on your account which is standard practice these days

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So what does all that mean Well it means that

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on your hundred grand of stocks in your brokerage account

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you can borrow twenty five thousand dollars like tomorrow by

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writing a check against it too dishonest Dean's discount dealership

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and pay interest to Morgan Stanley or Schwab or whoever

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has your brokerage account But you'll only pay about one

01:36

hundred basis points over prime rates or in today's world

01:39

three four percent if something like that nothing like that

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fifteen ish percent egregious amount that the auto dealer would

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want And this makes sense right when you're borrowing from

01:48

yourself If you ever don't pay yourself back while going

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to be really easy to track down the deadbeat right

01:54

Morgan and Schwab happy to pledge or Chi pa Tha

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Kate your stock to a bank and provide you whatever

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cash liquidity you need by Bessie Tuo Morgan and Schwab

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will pay maybe two percent or less on the money

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They let you borrow for three percent or more so

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they make a one ish percent spread for doing almost

02:12

nothing Nice work if you can get it And that

02:14

fifty percent margin limit thing Well what does it mean

02:16

Well let's say you've borrowed that twenty five thousand dollars

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and weren't disciplined to pay it off And it just

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sat there And then we had a really bad bear

02:24

market Like a mortgage crisis market that went down by

02:28

half or the individual stocks he loaned in there simply

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went down by half And all of a sudden one

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day you wake up and you have fifty thousand dollars

02:35

in change in the value of stocks in your account

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Oh this is a problem Why Because if you don't

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have atleast double in value in your account that money

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you've borrowed the brokerage has the right to just sell

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willy nilly Whatever assets you have to be certain that

02:51

you in fact keep it least double coverage right Why

02:54

Well they're letting you borrow money or at least borrow

02:56

liquidity at a very low price So they understandably expect

03:01

very low risk And if the market then goes down

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another ten percent and your value is down to forty

03:06

five grand and you still have twenty five thousand dollars

03:09

in margin or borrow their well Then the brokerage can

03:12

and will immediately pick whatever stocks they want to sell

03:15

an anger behalf They will sell five grand worth of

03:17

stock just to get you to that magic half zone

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So think about it There's a big big problem Why

03:22

they sell five thousand dollars worth of stocks to pay

03:25

down your twenty five thousand dollars of borrowing to then

03:27

be just twenty thousand Well in a margin account you

03:30

have forty grand now in value But those were stocks

03:33

that were gifted to you or maybe stocks you owned

03:36

a long time So now not only has the brokerage

03:39

soul chairs at a low price but you will owe

03:41

taxes on the gains from that five grand of sales

03:45

so you'll have to sell more shares down the line

03:47

to pay the kindly loving people of the I R

03:49

s bottom line Margin accounts are great if you manage

03:53

them and if you don't well yeah they end up

03:55

managing you

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