Blowing up a margin account

[horowitzvlad]

Question about liability and margin.

If I have 10k in my account and short 2000 shares at 5 dollars, what happens if, the next day, the stock opens at 20? Obviously, I lose my 10k, but is the broken completely liable for the 30k remainder? Can they sue a customer or respond similarly?

 

[drcha]

Yes, yes.

 

[EpiphanyTrading]

Quote from drcha:

Yes, yes.

The broker will come after you and win.

 

[mgmaggie]

Quote from horowitzvlad:

Question about liability and margin.

If I have 10k in my account and short 2000 shares at 5 dollars, what happens if, the next day, the stock opens at 20? Obviously, I lose my 10k, but is the broken completely liable for the 30k remainder? Can they sue a customer or respond similarly?

The Broker is suppose to have a risk management policy in place to prevent such things. Since you are short and the Broker would have had to have the stock to enable you to short it would be interesting to see if they would sue and waste money and time as their long stock ensured they in a sense never were exposed or incurred a true loss.

 

[horowitzvlad]

You guys might be right, but I've been researching this and am coming up completely empty. I can find no instances of this occurring:

http://www.google.com/search?q="broker+sues+client"&

http://www.google.com/search?q="brokerage sues client%22&

http://www.google.com/search?q="brokerage sues%22&

Nothing.

Here's your typical disclosure,

http://www.scottrade.com/online_trading_documents/brokerage_firm_margin_disclosure.asp

*You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to Scottrade to avoid the forced sale of those securities or other securities in your account.*

This is not the same as saying, "to avoid being sued for everything in your bank account." That's not there, and I can't find a single example of it ever happening.

I just now sent a question to the SEC about and will post back if they reply. Somehow I'm guessing they'll say "Talk to a lawyer" if anything.

 

[horowitzvlad]

mgmaggie,

That's what I'm thinking, but I definitely need to know for sure.

 

[horowitzvlad]

Talked to a guy from optionsxpress, and the answer is, yes, they'll put a lien on your other assets.

 

[Surdo]

Quote from horowitzvlad:

Talked to a guy from optionsxpress, and the answer is, yes, they'll put a lien on your other assets.

Double check your math, it is off by $10K!

The position lost 15 points X 2,000 shares = ($30K) - $10K in the account = $20K due!

Yes they can hold you reponsible.

 

[nkhoi]

Quote from horowitzvlad:

Question about liability and margin.

If I have 10k in my account and short 2000 shares at 5 dollars, what happens if, the next day, the stock opens at 20? Obviously, I lose my 10k, but is the broken completely liable for the 30k remainder? Can they sue a customer or respond similarly?

why do they want to sue you? they def will ask you to wire them the diff.

 

[independenceair]

Options...stay in S&P 500 ..those gaps you mentioned , terrible things just like penny stocks sometimes