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.
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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.
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