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Yes and if it gaps down their broker won't be able to sell fast enough to cover the margin loan. The broker can then usually come after the person's other asset
by drited 6y ago
Yes and if it gaps down their broker won't be able to sell fast enough to cover the margin loan. The broker can then usually come after the person's other assets (ie traders can lose more than the cash they transferred to the account in the first place).
- gknoy 6y agoHow does that even work, though? If I've bought a stock for $200, how could I end up owing more than what I already paid? I feel like I don't understand what situation you're describing.
- ohyes 6y agoMargin accounts. You buy the stock for $200 but of the $200, $100 is money that you've borrowed. Because the stock is now at $350 your assets cover the margin easily. but if the suddenly becomes liquid and gaps down to $2, you owe $100 and only have $2 dollars in assets with which to cover your margin loan. You get a margin call and the bank force sells your stock then takes your car, your house, etc to cover the $98 you still owe.
- djbebs 6y agoIf you borrowed money to buy it (margin)
- drited 6y agoIf part of the 200 paid for your long position in the share was paid for with a margin loan, then you may only have put 40 of equity in the account with the remaining 160 paid for with a loan. You're exposed to a maximum loss of 200.