If you are margined to the limit and a stock goes down, your broker will force you either to pony up some more cash or else force you to sell at whatever price you can get until you have enough equity to cover the loan amount, 25 or 30%. So if you have $10,000 in your account and buy 400 shares of, say, APM @ 100(a completely hypothetical stock symbol, I hope it's not really in use), you have $10,000 of equity and a $30,000 loan, the absolute max. If the stock goes down to $90 and you don't get him another $3000 pronto, your broker will use a limit function to determine how much stock you can still support and sell roughly 140 shares of your stock at $90 (I'm not about to do the math), giving you maybe 260 shares remaining with $6,000 equity and a 75% loan now equal to about $18,000.
Or more clearly, i\If your stock goes to $75, he'll sell it all to cover the loan and you lose the entire $10,000.
The "margin squeeze" for market manipulators comes from the sell-side pressure this forced selling puts on the stock. It puts a significant number of shares for sale at "market", driving the price down even further. |
