O.k...lets look a long position that someone is using margin, 100% margined out or they have $10,000 of their money in it and $10,000 of the brokers money in it or they borrowed $10,000 on a long position.
Then the position / pps drops, the broker will send out a margin call at certain points to the shareholder letting them know that they owe "X" amount to the broker on the "loan" or they will sell the position and if the proceeds from the sale font equal the amount borrowed, plus interest, plus commission and other related fees, then they come after the shareholder for the whatever that amount is.
You can end up owing more than you borrowed in the first place. And where do you get the money from?.......yep....and the broker, Ameritrade, Schwab etc....maaaan they come after you ......it will make owing the IRS look like a picnic. The brokers are like owing money to the mafia.
How do I know this.....I got smoked on a position, I was heavily margined on one and it came out with poor news and it opened up pre market down 35% and dropped fast. I was on the phone with the broker / Ameritrade at 3:00 a.m. doing this. All in all, I lost $80k on that one.....I owed Ameritrade something like $20k........They gave me 12 months to pay it off or they were going to take legal action.....they let me make payments of $2,000 a month to them.
I remember the call from their legal department well......these people don't play games.
Keep the above in mind and lets move on to a short position.
Investopedia:"In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity."
Question 1: Borrowing shares from whom?
The Broker
Question 2: How do you sell a borrowed share that you still owe on?
With money out of your pocket
Question 3: Is this all hedge fund controlled?
Mostly yes...and on a penny stock 100% yes as only the MM's can short on a penny stock.
This is why MM's can go bankrupt in a quick hurry on a short position because they end up owing more on it than they have funds to cover.
Its because they wait to cover a position to see if it reverses course and starts dropping again. Game stop caught them by surprise....they waited and it didn't drop. The brokers called for their money and they ended up owing a ton of money.
LAHO being another example. The MM's that were shorting that one had their fingers ion the meat grinder. So instead of covering the position and losing money on it, they called in that favor from the SEC and burned the shareholders.
Then the position / pps drops, the broker will send out a margin call at certain points to the shareholder letting them know that they owe "X" amount to the broker on the "loan" or they will sell the position and if the proceeds from the sale font equal the amount borrowed, plus interest, plus commission and other related fees, then they come after the shareholder for the whatever that amount is.
You can end up owing more than you borrowed in the first place. And where do you get the money from?.......yep....and the broker, Ameritrade, Schwab etc....maaaan they come after you ......it will make owing the IRS look like a picnic. The brokers are like owing money to the mafia.
How do I know this.....I got smoked on a position, I was heavily margined on one and it came out with poor news and it opened up pre market down 35% and dropped fast. I was on the phone with the broker / Ameritrade at 3:00 a.m. doing this. All in all, I lost $80k on that one.....I owed Ameritrade something like $20k........They gave me 12 months to pay it off or they were going to take legal action.....they let me make payments of $2,000 a month to them.
I remember the call from their legal department well......these people don't play games.
Keep the above in mind and lets move on to a short position.
Investopedia:"In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity."
Question 1: Borrowing shares from whom?
The Broker
Question 2: How do you sell a borrowed share that you still owe on?
With money out of your pocket
Question 3: Is this all hedge fund controlled?
Mostly yes...and on a penny stock 100% yes as only the MM's can short on a penny stock.
This is why MM's can go bankrupt in a quick hurry on a short position because they end up owing more on it than they have funds to cover.
Its because they wait to cover a position to see if it reverses course and starts dropping again. Game stop caught them by surprise....they waited and it didn't drop. The brokers called for their money and they ended up owing a ton of money.
LAHO being another example. The MM's that were shorting that one had their fingers ion the meat grinder. So instead of covering the position and losing money on it, they called in that favor from the SEC and burned the shareholders.
