Can I Lose More Money Than I Put Into My Account?

A stock can go to zero. It can’t go lower.

That one fact settles most of the question. If you buy shares with your own settled cash, the worst case is that the company fails and the shares become worthless, so your loss stops at what you paid and nothing about the trade can send you a bill afterward. Anything that breaks the cap involves borrowing: money, shares, or the obligation you take on when you sell an option.

Three ways an account goes below zero

Start with margin. You borrow part of the purchase price from the broker. Under the Federal Reserve’s Regulation T, the initial requirement for most stock purchases is 50%, so you can buy about twice what your cash alone would buy. FINRA then sets a maintenance minimum of 25% equity, many brokers add their own higher house levels on top, and once your equity drops below whichever level applies you get a margin call, which the broker can meet by selling your positions without waiting for you. If the price falls far enough that the position is worth less than the loan, the shortfall is yours.

Short selling is the second. You sell borrowed shares and have to buy them back later. A long position can only fall to zero. A short has no ceiling on the loss, because there’s no ceiling on how high a stock can go.

Then there’s selling options. An uncovered call carries the same open-ended risk as a short sale, and written puts can cost far more than the premium you collected. Buying options is a different story. When you buy, the premium is the most you can lose.

A margin gap, worked through

Speed is what hurts you here. Maintenance calls assume the broker can sell you out before equity runs out, and a price that jumps overnight on bad news skips every level in between.

A margin call couldn’t have saved you. At the FINRA 25% minimum, the call would have come at about 33.33 on this position, but the stock never traded there: it went from 50 at the close to 20 at the open without printing a single price in between.

A short squeeze, worked through

Shorts blow up in the other direction. Say you have 8,000 of equity and short 200 shares at 30, collecting 6,000. Before the open, someone announces a buyout offer at 75, and the stock opens near the offer price.

You lost one and a half times what you received for selling the shares. Nothing exotic went on. A short can lose several times its starting value whenever the price more than doubles, and takeover bids, surprise approvals and crowded squeezes are exactly the events that do it in one step. Hard-to-borrow names pile fees and recall risk on top.

How to cap the loss

Start with the account type. A cash account that only buys stock can’t go below zero from trading, which is the main case made in starting in a cash account.

Then size positions for the gap. A stop feels like a cap. What it actually does is trigger an order, and what happens to your stop when a stock gaps explains why the fill can land far past it. On margin, ask yourself something harder: if this stock opened 60% lower tomorrow, would the account still be positive?

When you want leverage or a bearish view, use structures with defined risk:

• A long put in place of a short sale.
• A long call in place of margin.
• Spreads with a bought leg.

You can calculate the maximum loss on each before you enter. Options behave differently from stock in several other ways, covered in options are a different trade.

And treat your buying power figure as the broker’s limit. It tells you what the broker will lend, which says nothing about what you should borrow.