Since I know practically nothing about the stock market I'm curious about this. Can someone explain the following to me in simple terms? And after giving the 200 grand he lost it all anyway? ???
- Now what do you want?
- I need 200,000 to cover your account.
- I gave you 200 grand.
- I need it again. I'll give you an hour.
- If you don't have it, I'll sell you out.
- All right, I'll get it.
This is because he bought his stocks on margin.
Imagine I buy $1,000,000 of stock. I pay $100,000 cash and borrow $900,000.
This works great in an upmarket: The stock goes up 10%, and now it's worth $1,100,000. I sell my shares, pay back the $900,000 loan and keep $200,000. I've doubled my money on a 10% increase (Minus interest payments on the $900,000)
In a downmarket imagine my $1,000,000 dollars of stocks is now worth $700,000. I've lost my $100,000 cash AND I now have to cover the $200,000 I borrowed to not default. I cover the $200,000 but the stock still drops to $500,000. I have to pay an additional $200,000 to cover my account.
that was why the crash hit everything so hard - people weren't just losing everything they had (which would have been bad enough anyway), they were losing 9 or 10 times everything they had.
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