I owe Etrade $106k, ouch

Sounds like the statists really got inside your head. Why shouldn't your friend's friend be allowed to voluntarily put anything inside her body that she wants to.

>libertarian feels

When you "short sell" a stock, you're betting that the price is going down. Now, for you to actually profit from the downswing the transaction has to be structured in a certain way.

The way this works is that you place an order with your broker to "short" a certain amount of stock. Let's say a lot of 100 shares. What they do is immediately purchase and then sell 100 shares. Let's say the price at this point is $100 a pop. Your account is thus credited $100 x 100 = $10,000.

Now, a short sale entitles the broker to the equivalent number of shares to close the position (this is called "covering"). So, since in this case they purchased and sold 100 shares, you now owe them 100 shares.

Let's say the price drops to $50 and you want to close. You simply buy 100 shares @ $50 and pay 100 x $50 = $5000. Remember how your account had been credited $10000? You're now left with $5000 which is your profit to keep.

But... what if the price had gone up to $200? $400? In that case, you still owe them 100 shares. So you'd have to pay 100 x $200 = $20000 (leaving you with a net loss of $10k) or 100 x $400 = $40000 (leaving you with a net loss of $30k) respectively. As you can see, your downside is theoretically unlimited.

This downside is particularly relevant with very small stocks. With a stock valued around $2/share, it's much easier for it to 10x in value than a $50-100/share stock.

For this reason, you need to have one of the following tools available to you when shorting: 1) A great broker that will monitor and close out of huge losses 2) An opposing limit order (an order that triggers when a stock reaches a certain price, allowing you to cover) 3) A computerized trading system that will react to an adverse situation instantaneously.

The basic rule of thumb in investing is "buy low, sell high". The twist here is that you don't need to do it in that order (i.e. he was hoping to "sell high" first, then later "buy low" - referred to as "shorting"). So, since he thought the stock was overvalued (and that the price would eventually drop) he decided to sell some shares, even though he didn't yet own any. The way he did this is by borrowing the shares from ETrade, then selling them. So he then owes ETrade the amount of shares that he just borrowed. Later (hopefully for him, when the price dropped) he could purchase shares of the stock, and repay ETrade. So, what he's hoping for: Borrow X shares from ETrade, and immediately sell them at $2. Sometime in the future, buy P shares at ($2-y$) and return them to E*Trade. He makes a profit of P($2-$y) (excluding fees). Note here that the absolute maximum he can profit is P($2), if the stock goes to $0. What actually happened was that the stock had a dramatic price increase (something like +$14). At that point, ETrade wants its shares back that he borrowed at $2 a piece, so he buys them at $16 and loses P($14), which is much more than he had in his account.

This is a highly volatility stock, (because it's in the news right now) which a lot of retail investors are playing. News happened in the overnight that sent the shares soaring, then the algorithms sent the shares even more.

Basically, the trader was betting the company was going to go bankrupt, it went the opposite direction and he lost money.

Also Etrade will collect interest on the margin debt.

It's not entertaining, it's sad.

See my explanation above on albright's comment