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.
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Finance: What are margin account, margin...1 Views
Finance Allah shmoop what is a margin account I think
the bank of you you have one hundred grand in
stocks saved in a margin account set up at your
kindly loving Morgan Stanley or Schwab brokerage Lots of lawn
mowing and rich Uncle dying went into getting that hundred
grand Bessie Mae dies You need Bessie Mae two point
Oh the kind with round wheels this time Yeah she'll
cost twenty five grand You don't want to pay the
fifteen percent interest that the auto dealer offers you generously
loaning you the money And if you sell twenty five
grand worth a stock well you'll pay almost ten thousand
dollars in taxes so you'd have to sell something closer
Duff forty grand to net the twenty five grand after
tax And wow that's expensive for Bessie Mae Two point
Oh with the round wheels and air conditioning and windows
that actually work So you really don't wanna have to
sell stock The vastly cheaper solution is to borrow money
from yourself All right Well how do you perform this
magic Well your brokerage account is set up as a
margin account That is when you set it up You
checked and signed all the boxes that claimed you knew
what you were doing were of sound mind when you
signed and you realize that there's a fifty percent margin
limit on your account which is standard practice these days
So what does all that mean Well it means that
on your hundred grand of stocks in your brokerage account
you can borrow twenty five thousand dollars like tomorrow by
writing a check against it too dishonest Dean's discount dealership
and pay interest to Morgan Stanley or Schwab or whoever
has your brokerage account But you'll only pay about one
hundred basis points over prime rates or in today's world
three four percent if something like that nothing like that
fifteen ish percent egregious amount that the auto dealer would
want And this makes sense right when you're borrowing from
yourself If you ever don't pay yourself back while going
to be really easy to track down the deadbeat right
Morgan and Schwab happy to pledge or Chi pa Tha
Kate your stock to a bank and provide you whatever
cash liquidity you need by Bessie Tuo Morgan and Schwab
will pay maybe two percent or less on the money
They let you borrow for three percent or more so
they make a one ish percent spread for doing almost
nothing Nice work if you can get it And that
fifty percent margin limit thing Well what does it mean
Well let's say you've borrowed that twenty five thousand dollars
and weren't disciplined to pay it off And it just
sat there And then we had a really bad bear
market Like a mortgage crisis market that went down by
half or the individual stocks he loaned in there simply
went down by half And all of a sudden one
day you wake up and you have fifty thousand dollars
in change in the value of stocks in your account
Oh this is a problem Why Because if you don't
have atleast double in value in your account that money
you've borrowed the brokerage has the right to just sell
willy nilly Whatever assets you have to be certain that
you in fact keep it least double coverage right Why
Well they're letting you borrow money or at least borrow
liquidity at a very low price So they understandably expect
very low risk And if the market then goes down
another ten percent and your value is down to forty
five grand and you still have twenty five thousand dollars
in margin or borrow their well Then the brokerage can
and will immediately pick whatever stocks they want to sell
an anger behalf They will sell five grand worth of
stock just to get you to that magic half zone
So think about it There's a big big problem Why
they sell five thousand dollars worth of stocks to pay
down your twenty five thousand dollars of borrowing to then
be just twenty thousand Well in a margin account you
have forty grand now in value But those were stocks
that were gifted to you or maybe stocks you owned
a long time So now not only has the brokerage
soul chairs at a low price but you will owe
taxes on the gains from that five grand of sales
so you'll have to sell more shares down the line
to pay the kindly loving people of the I R
s bottom line Margin accounts are great if you manage
them and if you don't well yeah they end up
managing you
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