Into the Red: How Trading Accounts Go Below Zero! | Podcast Episode #354

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market. And today we’re going to talk about whether or not you can lose more money than what you put in the stock market. It’s like you put $100 into the stock market and you all of a sudden find out that you’ve lost $200.00 in the stock market.

0:45
Is that possible? And if so, what’s the things that will cause you to lose that kind of money? And what’s the best way to avoid those kinds of scenarios where you’re actually losing more than the money that you put into the market? Now, granted, we don’t want to just put money into the stock market for us to lose all of it.

1:00
I mean, I don’t want that either, but I definitely don’t want to lose more money than what I actually put in it. And there is scenarios that that can happen in. So we’re going to address that. And so for this e-mail, we’re going to call the guy Farmerdale because he works on the farm. And Farmerdale writes, hey, I’ve been enjoying your podcast lately and I have some questions.

1:18
Is there a safe way to Start learning to how to trade stocks? I heard all about individuals waking up to big negative balances and their accounts. I’m a farmer who has a little bit of extra time sitting in the tractor and would like to learn how to trade stocks. But for now I just want to learn and not make money.

1:34
I am fine with losing the money I put towards the stock market, but I don’t want to somehow end up going below 0. Sorry if this is a simple question. Thanks for your time Farmer Dale. Now, nothing wrong with that question. It’s actually an important question because if it wasn’t an important question, we wouldn’t have stories of where people have lost more money than what they have put into the stock market.

1:54
Now a couple things about what he says in the e-mail. I would probably kindly correct them on 1st off is that he’s correct in one sense that he wants to learn and not make money. But it doesn’t have to be 1 or the other. Our focus should be making good trades and letting the profits take care of themselves.

2:11
Being disciplined, planning out the trades, making sure that we’re taking the steps necessary in order to attain profitability, but not necessarily making profitability our main focus. In order to get there, we got to make these other areas of focus more important.

2:28
The other thing is that you don’t want to necessarily be just fine losing the money that you put into the stock market. We don’t want to be fine with losing, but it does come with the territory. Especially early on, you’re going to have some Nicks and bruises along the way. In fact, even when you’ve been doing it for 20-30 years like I have, there’s still going to be droughts.

2:48
They’re still going to be problems that you experience along the way. There’s going to be struggles and you’re going to have to rely on those experiences in the past to be able to get you through your current struggles. So I’m going to focus on four different areas that can lead to your account going into zero. Now there Are these the only four areas that can cause your account to go below 0?

3:05
No, there’s probably other things out there, Some of them I might not ever heard of and then there’s others that I might just be forgetting to mention on this podcast. But any case, four of them that I want to talk about, the first one being leverage and margin, leveraging ourselves using margin, what does that mean exactly?

3:21
It means if you have $100 trading account, you can apply for margin that gives you the ability to trade beyond just that $100 in your trading account. You can trade like 150 or 200 depending on what they approve you for. There’s prop firms out there, which I always encourage people never to use because most of them are frauds and scams.

3:37
Those prop firms will guarantee you anywhere from like 25 to 1 margin. Now that’s crazy. I mean it’s it’s essentially like you go down a few percentage points and you’ve wiped out your whole account. And then some of them, they don’t even actually tie you to real life trading. They give you a simulator that they pass off on you as being a real trading account, and then they’re just keeping your money until you actually blow up.

3:58
And then they’ll tell you blew up, but you actually didn’t because you were never actually trading. They’re just keeping your money. True story happens a lot. Don’t use prop firms, but if you’re going through like a Schwab or a TD Ameritrade or a E*Trade or international brokers and they approve you for margin, yes, you can go beyond what the capital is in your account.

4:17
Now you’re paying interest on it. So if you go into margin for a full year, you might be paying 10 or 12% for an interest on that margin. So you really want to be careful about using margin. P Personally, I don’t use margin at all. I don’t go beyond the money that I have in my account. Doesn’t mean I don’t have a margin account because you got to have one for shorting.

4:33
But I don’t go beyond the capital that I have in my account. So I always want to make sure that I’m staying within my main, staying within the boundaries. Other people, they don’t like to do that. I’m a firm believer that that it’s not a good idea to trade beyond the money that you have in your account. So let’s say back in March when we were having the regional banking crisis, we saw a lot of banks just falling apart.

4:51
You saw First Republic, you saw a Silicon Valley bank, which was at the heart of it all falling apart. You saw Silicon Valley Bank drop like 7080%. And you said yourself, wow, that thing’s going to bounce right back. I’m going to buy that stock and you buy it. But you don’t just put your money into the trade. You slap down 150% on that position, meaning you go 50% of what you have in capital going into margin.

5:12
So you have a position that’s 100 and 50% and then you wake up the next day and the stock is no longer exists, it’s gone, it’s been taken over. I can’t remember, I think it was JP Morgan that took it over and now all of a sudden you’re out because the shareholders, they’re not going to get compensated.

5:28
So all of a sudden that money that you borrowed in margin has to be repaid. And so if you’re going beyond your means, if you’re going beyond the money that you have in your account to buy a stock and something like that happens, you’re on the hook to pay that back to your broker. And no, you can’t delete the app like some people think and believe that it’s going to go away.

5:46
I’ve also seen people during that time that fell to that whole scenario playing out that thought they could get a refund on the trade. And no, you can’t do that. And so I had a person, I know, I know someone that they didn’t go into margin, but they put about $15,000 down on Silicon Valley Bank.

6:03
They woke up the next day completely gone. It stinks. That’s why when you’re seeing these kind of major crises playing out, don’t be the hero and think that you got to get into that stock just because it’s down so much and that’s going to pop back up. Because if it does not, you’re looking at an absolute disaster unfolding.

6:21
You saw that even just this week with HE Hawaiian Electric. They had all those fires in Maui this past week, and Hawaiian Electric, some people were starting to blame them for it. I don’t know exactly what happened there to cause the fires, but I know that their stock was greatly affected by their stock was in the 30s, high 30s, and now it’s down into the teens and it goes from 15 when a lot of people thought that okay, there’s no way this thing can go any lower. I’m going to buy it here. Then all of a sudden they’re down 33% the next day or a couple of days when it goes down, another 33% down to $10. And so one, it’s not good to use margin 2. It’s not good to try to be the hero on these catastrophic plays that are taking place in the market more and more frequently.

7:01
The second one is naked calls. Now what is that? It’s a form of options trading, essentially. You don’t own any of the underlying shares and you’re selling the calls to in person. Now, I’m not going to get into options trading here. That’s not the main point of this podcast episode to explain necessarily what a options call is or what a put is or what it means to sell versus buy. But it’s essentially in this scenario when you’re selling options and all of a sudden, let’s say the stock has an FDA approval in this, in this stock is shot up to 100%, you’re on the hook. And you could lose a lot of money. Because if that’s something that happens before the market opens the next day and it happens in the premarket and that stock shoots way up before the market even opens, you’re in big trouble.

7:43
You’re going to have to put up some collateral or the brokers going to liquidate your shares and you’re going to have to owe the difference for going down into zero. So, so far, we know two things we know don’t go selling naked costs. There’s other options strategies out there too that can get you into a lot of trouble. The lesson there with options trading, don’t do options unless you know the risk.

8:01
I don’t trade options at all either. I don’t like options, but don’t sell costs. They will get you into a lot of trouble. And then the other one is don’t go into margin because you do risk having a negative deficit if the whole position goes completely against you like it did with Silicon Valley Bank the 3rd.

8:18
And this was a pretty interesting one. And and up until 2020, I’d never seen it before, but there was a futures contract. I think it was the March 2020 futures contracts or it might have been the April ones. They went to -37 dollars a barrel. That was crazy. And So what was happening there is the options contracts were expiring and when that happens, somebody has to take delivery on those barrels of oil.

8:40
And so you got to have storage for it. Well, because everything was in lockdown and everything was being shut down as as the pandemic was going about, there was no place to put the oil. So what do you think happened? They had to keep dropping the price lower and lower and lower until somebody was willing to buy these contracts.

8:57
And it all happened right at the end of the day, it went all the way down to -3738 dollars a barrel, something crazy like that. You could have made money by buying the oil. That means you’re not putting forth capital. They’re paying you to take the delivery.

9:13
It was literally free oil. Now my mind, I remember watching it all play out and I’m looking at this and that. Now I know in hindsight what I would have done. I probably would have bought some oil and just figured out, you know, figure out how to take delivery of it. But looking back at it at that particular time, I’m like, what is actually going on here?

9:31
So I never did anything. I did not act on it. I wish I would have, but oil actually went negative. And so people who were trying to offload these contracts that did not want delivery was having to sell them in a negative. That means if they had all their money tied up in oil futures, they were selling it at a negative, meaning they were losing all of their money in their account plus the amount that they were having to pay somebody else to take delivery of those contracts.

9:58
That was one of the craziest things I’d ever seen. Another crazy thing not related to this podcast episode was the fat finger crash of I think 2010, 2010. Yeah, May of 2010. That was pretty nuts as well. But anyways, I’m not going to get sidetracked on that one thing. I will tell you though, sign up for swing trading the-stockmarket.com Yes, this is my patron service that goes alongside of this podcast.

10:20
You’re going to get all my stock market research each and every day. That’s going to include updates on big tech. Also updates on the indices, S&P 500, the NASDAQ 100, the Russell 2000. Plus you’re going to be getting my bullish and bearish weekly watch list and my daily watch list for the different stocks that I’m I’m looking at from those weekly watch list.

10:39
So check that out. swingtradingthestockmarket.com and in the process you’re supporting this podcast. Finally, shorting stocks. Like I said earlier, if you want to short stocks, you got to have a margin account. But so often, and I kind of alluded to this example in the beginning, you can get these biotech stocks that one day you might see it trading at 100.

10:58
The next day, if they get this FDA approval and this is their big whammy of a product that they’re trying to get out to the public, it could go from $100 to $500. Now what if you’re short your entire account on that particular stock and it goes up 400%? What do you do? Well, all of a sudden if it goes from $100 a share to $500 a share, you’re in some big trouble.

11:18
You got to pay that money back to your broker. Now, how do you not lose money? By simply trading stocks from a buying standpoint, Not using leverage, not going into margin to do that. Yes, bad things can still happen when you’re just trading with your own money. You can see significant sell offs or major gap downs, but you’re not putting yourself at risk to lose more than what you put in safe ways to trade paper trading.

11:42
That’s probably the safest. You’re going to learn about the ebbs and flows of the market a little bit more, but you’ll never truly understand the emotions that come along with trading until you’re actually trading with your own money and another way to trade safe. Trade small. You don’t have to take on big positions. You don’t need to use 50% of your capital on a single position.

11:59
Figure out where you are the most logical, reasonable, and willing to be able to think through technical analysis and your trades and your investments, and what that position size looks like without the emotions getting out of control. If you know taking a position size of 20% causes your emotions to go haywire, that’s probably too big of a position size.

12:17
You got to chop that down some. So wrapping it up, this isn’t all-encompassing. I probably forgot some scenarios. I’m sure there’s some of you that’s listening to this. And like Ryan, you didn’t mention this, my apologies. But the four areas that I would say that you can lose more than what you put in, again going in the leverage of margin and something catastrophic happening selling naked calls the futures contract scenario that I was telling you about where you had a whole pandemic shut down the country.

12:42
That was a very weird time and I don’t know if we’ll ever see that again, but it did happen. And then for shorting the stocks and you wake up to a stock being acquired or there just being a massive gap higher due to a FDA approval or some kind of crazy news event that can happen as well.

12:58
So those are four risk areas. I hope you enjoyed this podcast episode. Make sure that you like and subscribe to me on YouTube and check out swingtradingthestockmarket.com. Keep sending me your emails. ryan@shareplanner.com I do read them all. I wanna make more episodes for you guys so keep sending the emails.

13:14
As long as I keep getting the emails from you guys, I’ll keep making podcast episodes. Thank you guys and God bless. Thanks for listening to my podcast Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner Trading Block where I navigate the stock market each day with traders from around the world.

13:32
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13:53
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.