Trading in stocks can help you get richer in a short amount of time. However, the market is volatile. If you are active, you will know that stock prices can rise and fall anytime.
Well, just to be clear, the value of a stock can fall extremely low and might even go down to zero (if the company goes bankrupt), but at no point will the value become negative. However, depending on the market and the company whose stocks you have invested in, you may be at a place where you might owe the broker money.
Losing money in the stock market is pretty common. So let’s discuss the circumstances when we can lose money and how we can avoid it altogether.
Can a share price go negative?
The price of a stock is not controlled by any governing body or financial council. Basically, the price depends on the numerous geo-political factors and millions of investors who regularly buy and sell the stocks on stock exchanges. Just like any other market, the price of a stock increases whenever there is an increase in demand, and people are willing to spend more to buy it. On the other hand, the prices decrease when there are more sellers than buyers.
Now answering the question “Can a stock go negative” the value of a stock can fall as low as 0, but it can never get negative. You cannot lose more money than you originally invested.
But, there are a few exceptions.
If somehow you decided to purchase the stock with non-borrowed money or did not use derivatives like futures or options, then obviously, there is a high chance that you may lose all your investment. For example, do you remember in May 2020, the commodity prices of WTI Crude Oil futures went negative? Well, some investment instruments can get negative.
Now let us discuss some instances of negative stock value.
1. Stock Price vs Enterprise Value
For instance, if a publicly traded company has more debt than the number of assets, then the value of shares won’t be negative; however, the enterprise value will become negative. Due to this, stock prices will be affected drastically, and in the end, the company will become bankrupt.
But you do not need to worry as you won’t lose more than your original investment (if you had bought their shares).
2. Trading on margin
Your trade is leveraged if you borrow funds from the broker to buy a certain stock. So if you make a loss while trading on margin, the lost amount will be multiplied by the leverage (the percentage of trade that will be decided by the broker).
In such a scenario, you will end up paying more than the money you invested from your pocket. Let us understand this with an example.
Let’s take an instance where you bought a stock using 50% of a broker’s money. So if the stock value falls below half of the original amount, you lose more than your investment. Unfortunately, now you owe the broker a lot more.
Obviously, there are certain rules and regulations in place that prevent the harassment of traders, but an incident like this can still happen if the system fails.
3. Short Position
You may lose a huge amount of money if you take a short position in a stock and out of the blue, the value skyrockets. Thus shorting should be avoided unless you are an experienced trader.
Risky Stocks which you must avoid
Generally speaking, investing in stocks is quite risky. However, investing in penny stocks or poorly managed companies increases the risk tenfold.
1. Penny Stocks
Penny stocks are much cheaper than other stocks; however, there is a high level of volatility. Any stock whose price is less than $5 is considered a penny stock.
Even though they might be a lucrative investment option, penny stocks are susceptible to scams, and the value can drop to zero suddenly.
2. Poorly Managed Companies
If the company you invest in has a poorly managed business model, the stock price can fall to near-zero levels. So, you must understand how a business works and its current status in the market before investing in it.
You might be an experienced stock market trader; however, it is not always possible to predict the prices. But even during extremely volatile market conditions, the price of a stock cannot be negative.
To be on the safer side, trade with your own money, and there is a much lesser probability of losing more than you have invested.
Investing in stocks requires knowledge and experience. If you want to know more about what happens if a stock’s value goes negative or need help with investing, MoneyIsle is there for you.
1. How can you protect your money?
You can protect your money by using stop losses, building a diversified stock portfolio, investing in an index fund like S&P 500 Index, or investing in ETFs.
2. Do I owe money if a stock goes negative?
If the value drops to zero, you will lose your entire investment. However, in rare cases, if the stock falls below zero, you have to pay the broker more than you originally invested.
3. Should you sell your stocks at a lower price?
You can always hold back your stocks and wait for the market to improve. However, you are always advised to sell it at a small loss rather than potentially endangering the whole amount.
4. Do you need to pay back negative stocks?
If you buy stocks with a cash account, then you will not own any money even if the value goes down. However, if you use borrowed money from the broker, and if the stock crashes, you might have to repay an amount greater than what you first invested.