I have a stock brokerage account, and I want to make sure that the things I do in it will not cause me to be liable for more than the amount I put into the brokerage account. My question is: under what circumstances will I be liable for more than the value in the account?
From what little knowledge I have, I believe that these situations could cause losses in excess of the cash I put into the account:
- Short selling
- Short positions in naked call options
For example, suppose my account has $2000 in cash, and I short 100 shares of a $10 stock. If the stock rises to $45 in a short time span, my stop-loss order could be ineffective. My broker would close out the position, leaving me with a -$1500 balance. This is a situation I do not want, because it requires me to pay $1500 in excess of what I had in my account.
Besides those instruments I listed above (which I really want to avoid), are there any other instruments I should avoid in order to keep potential losses within the value of the account?
To avoid the risk of losses in excess of the value in the account, I currently use a basic cash account (non-margin account with no ability to buy or sell options). However, I will soon be moving to a margin account with the ability to trade futures and options. I need to move away from the cash account because I want to sell covered call options (which I know is safe). I don't want to make it possible to lose my house just because I "accidentally" bought a very risky financial instrument with unlimited downside, so I need to know what these risky instruments are in order to avoid them when I get a margin account.