When it comes to stocks, most people want to know how to make profitable investments. In time, those people become experienced investors. Then, they either start looking for safer options that guarantee smaller profits or take more risks for more returns. Yet, while every investor knows that they can earn by investing, few know whether they could owe money in stocks. So, can you owe money in stocks? You can, but only if you meet specific conditions. Here is how you can lose more than you invest in stocks.
The Basics Of Stocks
Although most investors know this, it is best to mention that all investments involve a degree of risk. Whether you want to or not, if you decide to invest, you risk losing some and all of the money you have invested. Losing everything, however, is one of those scenarios that tend to happen rarely, if at all.
Chances are, you will not find yourself in a situation where you risk losing everything you have invested. That is unless you decide to back a business in its initial stages or you are a majority shareholder. In that case, investing becomes slightly riskier than it usually is. Those kinds of investments are undertaken by experienced investors that are beyond the scope of this article or the information presented here. As a result, there is no need to go in-depth on the topic.
So, back to our topic. Can you owe money in stocks? Can you lose more than you invest in stocks? These are two things that no investor wants to experience. Sadly, as we mentioned before, you can owe money in stocks and lose more than you invest. Surprisingly enough, it depends on how you have decided to invest.
In The Red
Firstly, can a stock go negative? That is the question that intuitively interests new investors. Ultimately, the answer is that shares can never reach negative values. Stock shares will never fall below zero, even if the company you chose to invest in goes bankrupt. That does not mean that you can never owe money in stocks.
So, can you owe money in stocks? There is one way for you to lose money investing. If you borrow money from your broker by opening a margin account, you could end up with debt more significant than your stock’s worth. In most cases, brokers will offer you a standard margin account. The standard margin account means that the broker can loan you no more than 50% of the value of your account. If, for example, you were to deposit $1000 cash or securities, a broker could give you up to $500 to use.
Why would a broker loan you anything? That 50% is additional buying power. You can use this buying power to purchase more stocks or even purchase some you could not afford. Is the broker, then, setting you up to fail? No, not really. It is in your best interest to have as much buying power as possible. The more you invest, the bigger the returns. There is no going around this principle of investing. That does not mean that ludicrous sums can save you from losing money on horrible investments. The only thing the broker is doing is giving you more investing power. The decisions, nevertheless, are always yours.
Once again, can you owe money in stocks? Yes. Can you lose more than you invest in stocks? Yes. Can a stock go negative? Luckily, no. If you consider that you need a margin account to owe money in stocks, you will instantly realize that there is an easy fix to that problem.
What is the fix? Do not open a margin account.
It is as simple as that. The benefits of having a margin account are clear. The more money you have, the more you can invest. Does that mean that you must borrow money from your broker? No. If you feel like that is the best option for you, by all means, take it. If not, you can always opt for a cash account.
Cash accounts are usually the best option for beginner investors who are unwilling to take more risks than they have to. To invest is to put your money on the line with the goal of profiting. That is already risky enough. You are by no means obliged to put money that you do not have on the line. That is where the cash account comes into play.
One Cash Account, Please!
Cash accounts allow investors to deposit their funds and use them as the sole resource for purchasing stocks. It means you will be limited to the capital you have at your disposal, which is both good and bad. While you will not go into debt, you will also have less buying power.
Lastly, on the topic of staying safe, there is one more thing you might want to avoid if you are not willing to risk going into debt – short selling. Short selling is the practice of betting on a share price falling. Investors can take part in short selling through various means, such as borrowing and selling shares that you plan on repurchasing (expecting a fall) and returning. Investors do this in hopes of catching shares, capitalizing on their fall, and then returning them at a profit.
While short selling is a complicated process, investors willing to look into it should research stocks retroactively and find a pattern. For example, based on Statista’s records of stocks with the most short sell positions, Sky Harbour Group (49.88%) is in the lead. Sky Harbour is tailed by Acrimoto Inc. (41.52%) Conn’s Inc. (42.51%), and Camping World Holdings Inc. (41.37%). These companies and their stock records can be a strong foundation for future research.
You can owe money in stocks. You can lose more than you invest. A stock can never go negative. Does that mean that you will unavoidable owe money if you invest? No, not in the slightest. Investors can choose between cash accounts and margin accounts. Even then, the chances that an investor will end up owing money are low. You can end up owing money in stocks, but that should not deter you from investing, and if you are willing to take a risk, it should not stop you from increasing your purchasing power. Sometimes, that extra risk might pay off.