An account liquidation occurs when the holdings of an account are sold off by the brokerage or investment firm where the account was created. In most cases, this is down to satisfy margin requirements. When you sign up for a margin account with a brokerage firm, you grant that the legal right to liquidate your holdings if you are unable to meet the account's requirements.
There are two main brokerage account types: cash accounts and margin accounts. A cash account only allows an investor to purchase securities up to the amount of the cash held in the account. For example, if an account has $10,000 in cash, the account holder will only be able to purchase a maximum of $10,000 worth of stock.
With cash accounts, a brokerage firm does not have the same ability to liquidate unless it is due to an external factor like a personal bankruptcy. A margin account, on the other hand, allows investors to borrow up to 50% of the purchase price of marginable investments (the exact amount varies depending on the investment). Said another way, investors can use margin to purchase potentially double the amount of marginable stocks than they could using cash.
Margin Math
A typical requirement of a margin account is to maintain at least 25% equity, or your own money, of the total market value at any given point. Maintenance levels can vary widely depending on your broker, for stocks trading under $5, or if you're short selling. For example, suppose you purchase $10,000 worth of stock with $5,000 of your own money and $5,000 of margin money. If the value of this position were to fall to $7,500, your equity position in the investment falls to $2,500 ($7,500 - $5,000), which represents 33% margin—above the 25% requirement.
However, if the value falls to $6,500, your equity in the position would be reduced to $1,500 ($6,500 - $5,000), which puts your margin at 23%, falling below the minimum margin requirement of 25%. If the account does fall below the minimum maintenance margin level, you will either have to add more money to the account to meet the margin call or your account will be liquidated in part or in full.
In most cases, your brokerage will issue a margin call advising you to add money to your account or close positions until your account reaches the 25% requirement. If you don't take appropriate action, your brokerage will take steps to close open positions until the requirement is met. They can do this without your approval and they may even charge you a commission for the trade.
FAQs
An account liquidation occurs when the holdings of an account are sold off by the brokerage or investment firm where the account was created. In most cases, this is down to satisfy margin requirements.
What is the meaning of share liquidation? ›
To liquidate means to sell an asset for cash. Investors may choose to liquidate an investment for a variety of reasons, including needing the cash, wanting to get out of a weak investment, or consolidating portfolio holdings.
What does it mean when your shares are liquidated? ›
Once a company is liquidated, the shares become worthless. This means for investors, they can declare their share as a capital loss and it can be removed from their portfolio.
What is the meaning of liquidation of accounts? ›
Liquidation: The process by which an entity converts its assets to cash or other assets and settles its obligations with creditors in anticipation of the entity ceasing all activities.
What happens when you liquidate shares? ›
Once a company enters liquidation, the trading of its shares is halted. These shares will then be “deemed worthless”, a term given to shares in companies that no longer exist. Shareholders who own shares in such a company can declare them as a capital loss, which can result in paying less income tax.
Is liquidation good or bad? ›
Liquidating assets can be good and natural in some cases, such as when an investor exits a position intentionally to realize profits or when a company liquidates assets to redeploy their value in an area it finds strategically important.
What does liquidation mean with money? ›
To liquidate means to convert assets into cash. For example, a person may sell their home, car, or other asset and receive cash for doing so. This is known as liquidation.
Who gets the money when you get liquidated? ›
Liquidation is typically an option if your business is insolvent and can't pay its bill or debts. When your business is liquidated, any remaining assets are paid to creditors and shareholders.
Why is liquidating bad? ›
Disadvantages To Liquidation
Sale of Company Assets: All assets owned by the company, including property, vehicles, and machinery, will be sold to pay off creditors. Personal Guarantee Liabilities: If you, as a director, have signed personal guarantees for business debts, these will be called upon during liquidation.
Do shareholders get paid in liquidation? ›
Shareholders and liquidation
The shareholders will only get paid any return on their shares in an insolvent liquidation after all creditors get paid in full.
Liquidation is the process of selling off assets to repay creditors and dissolve a business. An example of liquidation would be a company selling off its inventory, property, and other assets in order to pay its creditors and close its doors.
What is the purpose of liquidation? ›
The purpose of liquidation is to ensure that all the company's affairs have been dealt with and all its assets realised. When this has been done, the liquidator will apply to have the company removed from the register at the Companies House and dissolved, which means it ceases to exist.
What are the three types of liquidation? ›
4 types of liquidation of a company
- Partial liquidation. A partial liquidation is when a company sells only some, not all, of its assets and remains operational in some capacity.
- Complete liquidation. ...
- Voluntary liquidation. ...
- Compulsory liquidation.
Investors can cash out stocks by selling them on a stock exchange through a broker. Stocks are relatively liquid assets, meaning they can be converted into cash quickly, especially compared to investments like real estate or jewelry.
Should I cash out my shares? ›
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
What happens when you liquidate a bank account? ›
Liquidation is the process of permanently closing a bank and its branches, selling off any assets and using the proceeds to settle as many of the bank's remaining liabilities as possible. Typically, customer accounts are closed and checks are mailed to account holders for the amount of their insured deposits.
What is liquidation in simple terms? ›
Liquidation is the process of selling off assets and using the proceeds to pay off creditors and shareholders. It is triggered when a company is insolvent and is unable to pay its debts. Liquidation can also be voluntary, when the company decides to go out of business and liquidate its assets.
Does it mean when a company goes into liquidation? ›
The liquidation of an insolvent company allows an independent registered liquidator (the liquidator) to take control of the company so its affairs can be wound up in an orderly and fair way to benefit creditors.
