Legal Definitions - remargining

Remargining refers to the process where an investor, who has purchased securities using borrowed money (known as a margin account), must deposit additional cash or other acceptable assets with their brokerage firm. This action becomes necessary when the value of the securities in their margin account declines, causing the investor's equity (their own money) to fall below a predetermined minimum level required by the broker. It is essentially the act of restoring the account's equity to an acceptable level to cover the borrowed funds and avoid the forced sale of securities.

• Scenario: Individual Investor Facing Market Downturn

  Sarah uses a margin account to invest in several growth stocks. After a sudden market correction, the value of her stock portfolio drops significantly. Her brokerage firm notifies her that her account's equity has fallen below the required maintenance margin. To avoid the forced sale of her stocks, Sarah transfers a substantial amount of cash from her savings account directly into her brokerage margin account.

  Explanation: This is an act of remargining because Sarah is depositing additional cash to bring her margin account's equity back up to the required level after a decline in her investments.

• Scenario: Institutional Investor Managing Risk

  A small hedge fund has leveraged its positions in a volatile sector using margin. Unexpected negative news causes a sharp and rapid decline in the stock prices within that sector. The fund's prime broker issues a margin call, demanding more collateral. To meet this demand, the fund's managers decide to deposit a portion of their unencumbered government bonds into the margin account as additional collateral, rather than selling off other assets at a loss.

  Explanation: Here, the hedge fund is engaging in remargining by providing additional collateral (government bonds) to satisfy the broker's requirement after the value of their margined investments dropped.

• Scenario: Unexpected Price Fluctuation

  David holds a diversified portfolio in a margin account. One afternoon, a major company in his portfolio announces disappointing earnings, causing its stock price to plummet by 20% in a single day. Although his overall portfolio is diversified, this significant drop in one key holding is enough to push his total account equity below the brokerage's maintenance margin threshold. David quickly logs into his account and initiates a transfer of funds from his linked checking account to cover the shortfall.

  Explanation: David's action of transferring funds to his margin account to compensate for the sudden drop in a stock's value and restore the required equity level is an example of remargining.