Do You Owe Money If the Price of the Stock You Purchased Drops?

You concerned that you may owe your broker money? Let's find out what happens when the value of your stock falls and at what point you may owe your broker money.

By Simon Mugo
Edited by Taj Schlebusch

Published April 21, 2021.

No, you do not owe money if the price of a stock you purchased and now own drops. I'm sure you might be wondering how some hedge fund managers end up owing money to their brokers once a stock starts falling.

When Do You Owe Money to Your Broker?

To owe your broker money once a stock starts falling means that you have either used leverage to buy more stock than you could afford or sold uncovered options on the stock, which we can discuss in another article.

For retail traders, like many of us who buy stocks and hold them, hoping that they will rise and net us a nice profit when we sell them in the future, there is no risk of ever owing your broker any money even if your shares fall to zero.

What Happens When the Value of Your Stock Drops?

When the value of a stock you own is falling, what happens is that you have a paper loss, which could turn into a profit if the stock reverses course and rises again.

However, your paper loss can turn into an actual loss if you sell the shares for a lower price, crystalizing the paper losses. Once you sell, you cannot benefit from any future gains in the stock price unless you repurchase it.