Wiped Out in One Afternoon

You wire 10,000 dollars to a brokerage. You like a stock. The broker offers you 5x leverage. You click yes.

Now you control a 50,000 dollar position. 10,000 is your money. The other 40,000 is a loan from the broker, secured by the stock you just bought. On paper, every 1 percent the stock moves up earns you 5 percent on your equity. Tempting.

Tuesday morning, the stock falls 20 percent. The position is now worth 40,000 dollars. The 40,000 dollar loan has not changed. Your equity is exactly zero.

Then the phone rings. The broker is selling your shares right now to repay the loan. Because there were costs and the price kept slipping during the sale, you end up owing them 800 dollars on top.

You started with 10,000. The stock moved 20 percent. You now have less than zero. That phone call has a name. It's called a margin call, and it's the moment leverage stops being theoretical.