How is it possible? I thought you can only lose what you put in. So 100% max. But I’ve seen news and posts about how people lose much more than that.
In: 18
Selling short. You borrow 1 share of XYZ stock from Joe at $10, then sell it right away, hoping the price goes down. So at that point your net investment is $0. But then the price of XYZ jumps to $40. Now you still owe Joe 1 share of stock but have to buy at $40, losing $30
If you purchase a stock that is the maximum you can lose. That is put it as what you paid that might include fees to a broker.
If you, on the other hand, short a stock you can in theory loos an unlimited amount.
A bit simplified is short when you sell a stock today that you do not own and you then purchase it tomorrow. That means it the stock goes down in value you make money. The problem if it increases in value you need to pay that tomorrow.
So if the stock value is 10 today and you shot sell 10 stock you get 10 x 10= 100. But if it tomorrow increase to 30 instead of dropping you need to pay 30 x 10 = 300. So you loos 200
https://en.wikipedia.org/wiki/Short_(finance)
You can certainly lose more than you put in if you’re borrowing money because you’d owe what you borrowed, plus interest. With a margin account, you’re essentially borrowing money from the broker and incurring interest on the loan. If the stock you purchase declines in value, not only do you lose money because of the declining share price but you also have to repay the borrowed money plus interest.
Short selling is another way to lose more than you put in.
Leveraged accounts, essentially betting with money you don’t have. Simply purchasing stocks would fall under the risk you’re familiar with, the value could go to 0 and you’d be wiped out end of story. If however, you purchase options like selling shorts against a stock you don’t own and the price goes up rather than down you will have to pay to cover those calls by purchasing the stocks you didn’t actually have in the first place. This can lead to being margin called resulting in debt to the market.
There are strategies such as trading on borrowed funds (margin), short selling (selling borrowed shares), or writing options contracts that can put someone into a situation where they owe more than their account value if they are reckless or unlucky
Lets say the price of a company is $5 per share. For $100 I sell you the right to buy 1000 shares of that stock from me at $6 a share a couple months from now.
If I actually own 1000 shares of that stock, there’s not much risk, either the stock goes down and I’m ahead of where I would have been by $100, the stock goes up a little and i’m ahead by $100, or the stock goes up a lot and you exercise the options, paying me $6 per share, while I miss out on what I would have made from the price going over $6.
If I don’t own shares of the stock, I’m better off in the first two cases because I made $100 with no assets tied up. However if the price goes up a lot, I’m still contractually obligated to buy them at market price and sell them to you for $6. If it went up to $16, I now have to cough up $10,000 to satisfy the contract, even though I could have bought those shares for $5000 back when I sold the options.
By short selling stocks, by buying on margin (taking out a loan from brokerage to buy shares beyond what you have available cash to buy).
A common way is leverage or margins, it’s a loan that you then use to buy stocks
So if you put in $100 and leverage another $100, you can purchase $200 of stocks even though you didn’t have that available yourself. Then if for instance the stock price quarters. Now your stocks are worth $50 to sell, but you still owe $100 back for your loan, if not more depending on terms. So in this example you’ve now lost $50.
The margins can get quite high, where it’s 5-10x the price of what you commit. As such the price fluctuations that will lose you money is much much less than what I gave an example of and has a much higher capacity for losing or gaining money too.
There’s stocks and options (within options there’s calls and puts). Then there’s long and short. Then there’s margin accounts.
“Long” means you’re going to buy, then eventually sell.
“Short” means you’re going to sell, then eventually buy.
Margin accounts are accounts with borrowed funds. It’s like how a credit card company gives you a credit limit of $30k even though you only have $5k in your bank.
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Going short on stocks – you don’t have the stocks and it’s currently worth $30. You think it’s gonna go down in price so you borrow someone’s stocks at $30 and you sell it. The stock goes down to $5 and you buy it back, then you give the stock back to the person you borrowed it from. You profit $25. But if the stock goes up to $50 instead of down, and the owner of the stock wants it back – you’d have to buy it back at $50 and return the stock to the person you borrowed from, then you lose $20.
Then there’s options. You go short on a put. Stock is worth $30 and you think it’s going to go up to $40. You make an agreement with someone saying that if the stock ever drops below $25 by end of the week, you will buy 100 shares at $25, but this is a risk for you so the person will pay you $100 for you taking on this risk. End of the week comes, and the stock is $26, so congrats you just profited $100! But, if the stock drops down to $5, now you’re screwed and have to buy 100 shares at $25, so you spend $2500. But you got $100 for taking on the risk, so technically you spent $2400 on 100 shares on a stock currently worth $5 (which would’ve cost you $500), so you just lost $1900.
There are a few ways, but the most common by far is called leverage. Put simply – You borrow money to invest with and invest your money AND the borrowed money. If the stock goes down so much that you can’t pay back the money you borrowed you can owe more than you put in. People who “lend” to others who use this strategy almost always make what’s called a “margin call” before it gets that far which essentially means “Hey before you lose all your money and then some, we are requiring you to pay us back first”
It’s impossible to get “tricked” into making this mistake. Before even being allowed to trade on margin (loaned money), you have to jump through extra hoops to demonstrate that you understand what you are doing and the risks involved.
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