Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Forced Liquidation

What it is:

Forced liquidation is the sale of all investments within a customer's margin account by a brokerage firm, usually after the account has failed to meet margin requirements and margin calls.

How it works (Example):

To engage in trading investments on margin, brokerage firms generally require their investing clients to follow the firm's rules on margin requirements.

If an investment that was bought on margin drops in price, the account may become under-margined. The brokerage firm may then issue a margin call, notifying the client that they are under-margin in the account, and that they must either deposit more cash or sell some of the shares to offset all or part of the difference between the actual stock price and the maintenance margin.

Should the client fail to meet the margin requirements within the brokerage account, the firm holding the account has the right to force liquidate; they may sell off and close all open investment positions held in the account.

Why it Matters:

Brokerage firms use forced liquidation to protect themselves from the potential losses from under-margined accounts that are exposed to a declining value investment.

If a client with a margin account fails to respond to a margin call when their margined investment drops in value, the brokerage firm (who also allowed the client to borrow from them on margin) may be on the hook and suffer losses if they don't sell the investment.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...