Can Stocks Put You in Debt?
Stock investing sounds a little intimidating especially if you don’t have the foggiest idea of what on earth it’s all about. To a large extent, the thought of stock investing gets more daunting during uncertain times.
So it’s a valid question — can stocks put you in debt?
Well, there is no such thing as a risk-free investment. But stock investing can give you an average respectable net every year. If you look at it in the long run, it’s actually not a bad investment at all. If you know what you’re getting into and you have a complete understanding of stocks and how it works, then you should be fine.
The shifting see-sawing and yo-yoing in the stock market is enough to give some investors a bit of a fright. But stock investors, in general, need not worry about losing more than the amount of cash they invested at the outset.
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If there’s one thing you should ingrain in your mind, it’s this — the structure by which stocks are sold and traded along with the legitimate and legal protections given to owners of public stocks clinch that stock prices will never go negative.
If you hold shares in a public company, this means you own a part of the company’s common equity. So if the company’s value scales up like maybe double, then your stock value in theory will also double up.
Stock price variations mirror the stock market’s shifting valuations of an investor’s stock share. If the price of the stock falls five percent, then the stocks investors conceive that the value of the company has fallen five percent.
Now, while the shifting and swinging happen, the price of a stock can never go negative or below zero. Therefore, an investor cannot and will not owe money because the price of the stock has dwindled or decreased.
This is what is called a corporate shield — which the law shields or protects the stock investors in cases like these from personal liability. This simply meant that even if creditors of a public company can go after the assets of the company itself — they cannot go after the stock owners and they cannot run after the stock owners for money.
Should the company fail and go bankrupt, the company’s stocks can be conceived as valueless, but it can not get any worse than that.
So this is what happens. When a company’s stock diminishes below a specific price, it takes the risk of getting delisted. Getting delisted means it can no longer participate in exchanges or trade-in the major exchanges such as Nasdaq or New York Stock Exchange.
If a company gets delisted, it makes the stocks more tough and arduous to trade. It could also set off selling from institutional investors and as a consequence, it could affect a loss of confidence in the stock thereby damaging the price of the stock more.
Now should the company fail and go in the red, the stocks will usually cease trading during court meetings. If there is any worth for common stockholders after failure or bankruptcy, the stock might be able to begin trading again. Another scenario would be the stockholders might get some money for the stock’s value.
Perhaps that settles the niggling thought of the possibility of getting in debt should a stock price crashes to negative. However, there’s another possibility that some assertive and enterprising stock investors may owe money on a stock market portfolio.
This is what is called margin borrowing. Margin borrowing allows the stock investors to loan money in order to purchase stocks. This is usually accessible in many brokerages. That stock that has been bought serves as collateral for the borrowed money.
Let’s say, a stock investor with $20,000 USD may be able to purchase $30,000 USD worth of stocks by taking a $10,000 USD loan from the brokerage firm. In this scenario, in the event that the price of the stock goes down to zero, the investor would still owe $10,000 that he or she borrowed from the brokerage.
To sum it up, stock market investing is one of the great ways to grow your money in the long run. It’s not risk-free but you can lower down the risk of losing money if you have a complete understanding of how the stock markets work.
It is also wise to work with a trustworthy brokerage firm so you can be guided accordingly.
It’s also best not to put all your eggs in one basket — spread your investments to other companies as well. Investing your hard-earned money should not give you a fright, as long as you are in the know, you grab hold of strategies, and you get wise counsel, then you can invest responsibly and get the benefits in time.
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