Comment by rabidonrails | Hacker News Reader

Comment by rabidonrails | Hacker News Reader

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You could simplify this further by making it a bit more abstract:

You have $100 worth of stock in Google. You think Google stock is going to appreciate so you borrow $50 of my money to buy more stock. I see that you have $100 worth of Google stock which provides me with some security that you have a valuable asset and are a worthwhile borrower.

But, instead of Google's stock value increasing it starts to fall. You took my money and I'm getting nervous so I force you to sell your Google stock. At one point you had $150 worth of Google stock but now I've forced you to sell your stock for a total of $75 which allows me to recoup my lent money ($50) plus my fees and I really don't care how much money you are left with, if any.

This is important for the economy because credit (which this is) helps create growth and drives economies - when credit is tight then economies grow slowly if at all.

This is a bad example because no broker would force you to sell your own equity.

You had 100 dollars, you're leveraging 50 cents for every dollar you put in giving you a .5:1 leverage ( or 50%, or 1.5/1 as a fraction)

Only if the stock loses more than 100 dollars in your equity would the broker be worried and ask for margin. This means your $150 dollars of leveraged stock would have to drop to $50 dollars before the broker would be worried and sell your stock to get their $50 back. This means your stock could drop 66,7% or 2/3 as a fraction.

All fees are paid upfront and the rest from your margin. Not your stock.

Perhaps you're arguing that the leverage ratio I used as an example was extreme, but otherwise you are wrong that "no broker would force you to sell your own equity." If there's a margin call and you don't deposit additional cash, then a broker will force a sale of the stock. "Brokers may force a trader to sell assets, regardless of the market price, to meet the margin call if the trader doesn’t deposit funds."

[1] https://www.investopedia.com/terms/m/margincall.asp

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