Same-Day Substitution

  

Categories: Banking

Your perfect big sister is getting married. The day of the ceremony, your date gets sick and now you have to go alone. You search around for someone to fill in, someone who will impress your family. But everyone's busy. No one you know has time to go to the wedding. So you end up asking your obnoxious friend...but you make up a fake background and you bribe them to pretend to be someone else for the wedding. There's a whole makeover montage. Hilarity ensues. The plot of Same-Day Substitution...coming to Netflix this fall.

In finance, it has to do with activity in a margin account. Specifically, the term relates to the act of taking money out of your margin account, but then putting in the same amount later that day. So...money goes out, then money comes in...but overall, the balance on the account stays the same.

When you're trading on margin, you need to keep a minium amount in the account. That way, you can cover any margin call that takes place. If you happen to need some cash and taking the amount out puts you below the minimum, you have to replace it, or else you might trigger the margin call for whatever's left in the account.

The quick in/out of the same-day substitution avoids triggering the consequences.

Related or Semi-related Video

Finance: What are margin account, margin...0 Views

00:00

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

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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

00:45

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

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

01:17

limit on your account which is standard practice these days

01:19

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

01:31

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

01:57

Kate your stock to a bank and provide you whatever

02:00

cash liquidity you need by Bessie Tuo Morgan and Schwab

02:03

will pay maybe two percent or less on the money

02:06

They let you borrow for three percent or more so

02:09

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

02:19

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

02:30

went down by half And all of a sudden one

02:32

day you wake up and you have fifty thousand dollars

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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

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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

03:03

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

03:20

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

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they sell five thousand dollars worth of stocks to pay

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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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