Lets say I have $5k in my brokerage account and I buy a 100 shares of $50 stock on a 4:1 margin. So I put up $1,250 leaving $3750 in the brokerage. 5 minutes later the stock plunges to $4/share and I am down $4600, which I can't cover in the brokerage. What happens? Can I be in debt now to the brokerage? Or will they automatically liquidate my position?

  • You are not on margin when you have full $5k of cash in the account to begin with. – base64 Apr 22 '15 at 9:40
  • Please add a country tag. U.S. Initial margins are higher than 25% – JTP - Apologise to Monica Apr 22 '15 at 11:47
  • I guess the point of my question (math aside) is: if you enter a high leverage trade and it reverses below what you can cover in the account, can you then go into debt? Is it possible to lose 10s of thousands of dollars? – frankie Apr 22 '15 at 15:24

If the price had dropped to $4 from $50, and you had $5000 to start with on your account, you will be left with $400 in your account if you closed the position now. So you would not be in debt if this was the only possition you had open.

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    Answer what is asked by the OP and not what he should do, which can be added as an advice/recommendation. – DumbCoder Apr 22 '15 at 12:25
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    Problem is OPs math is wrong, he's 100%, not a margined purchase. – JTP - Apologise to Monica Apr 22 '15 at 13:01
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    @DumbCoder, you really have a problem reading don't you. Since the OP already has $5000 in his account, if that is the only position that he opens and then after price dropping he liquidates that position he will not owe any money. I have stated the facts not given any recommendations. – user9822 Apr 22 '15 at 22:31

Different brokerages have different house rules for margin requirements and margin calls. You will likely get a margin call giving you a small amount of time to deposit the required funds to bring your account balance up to the required margin requirements. In reality, a stock that falls from $50 to $4 in a short period will probably become unmarginable. In short, yes, you will owe the broker for the loss.

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