eli5: How do people lose more than 100% in stocks?

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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)

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.

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.

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