How to calculate short position in the stock market?

How is short selling considered a liquidation in the stock market_What is considered a liquidation in the stock market

What does short selling mean in the stock market? Perhaps many people who have just come into contact with the stock market are still unclear about this concept. , and I don’t know that short selling may cause a liquidation of the stock market. The following is the editor’s guide on how to calculate the stock market liquidation of a short position. I hope it can help you.

How is short selling calculated as liquidation in the stock market?

In the stock market, liquidation usually refers to when investors trade on leverage or borrow funds to trade, due to losses reaching a certain level, resulting in The account funds are insufficient to meet the maintenance margin requirements and the position is forced to be liquidated. Specific liquidation conditions and mechanisms vary depending on exchanges, brokers, and contract regulations.

Normally, the following situations may lead to liquidation in the stock market:

Insufficient margin ratio: In leveraged trading, the exchange or broker will require investors to place a certain proportion of Margin serves as collateral for a trading position. If the investor's account funds are insufficient to meet the maintenance margin requirements, a liquidation may occur.

Stop loss line is triggered: Investors usually set stop loss orders, which automatically close positions when the loss reaches a certain level. When an investor's loss exceeds the set stop loss line, the order placing system will automatically trigger a liquidation operation to limit further losses.

Overnight position liquidation: Some contracts and trading platforms may stipulate that positions that fail to meet maintenance margin requirements at a fixed time point (such as before the end of the trading day) will be forced to be liquidated to avoid the risk of holding positions overnight.

It should be noted that each exchange and broker may have different regulations and algorithms on the liquidation mechanism. Investors should understand and abide by relevant trading rules in detail before engaging in leverage trading, and set stop-loss orders reasonably to control risks. In addition, strengthening risk management and appropriate capital management are also very important to avoid liquidation.

What is called a stock liquidation

A stock liquidation means that due to a sharp drop in stock prices, investors have suffered a lot of losses, and even after all their principal has been lost, they still need to post money. situation. In the stock market, if investors carry out financing and the stock price drops to the financing liquidation line, if no additional margin is required, the position will be liquidated. After the liquidation, the system will automatically liquidate the stock, and the losses and handling fees incurred by the liquidation will be All borne by investors.

The liquidation line means: during the process of financing and financing, if investors are unable to pay off their debts in time or maintain the guarantee ratio below 130%, if they do not add collateral in a timely manner, they may face forced liquidation by the securities firm. risk of the position, and the maintenance guarantee ratio after the additional increase shall not be less than 140%.

Generally speaking, buying ordinary stocks will not liquidate your position unless the stock drops to 0 yuan, while margin trading and securities lending will liquidate your position because you are borrowing funds or securities from securities firms. However, securities companies do not borrow money in vain. They need to use securities as guarantee. If the securities fall below the guaranteed amount, the position will be liquidated.

What is short selling?

Short selling usually occurs in the futures market, because short selling is not allowed in the stock market under normal circumstances, but short selling can still be done through securities lending. Short selling means that when we short a stock or futures, our margin cannot be deducted from the loss because the stock price or futures contract rises sharply after buying. Because short selling can make a profit by buying the underlying price and falling, once the underlying price rises after buying, a loss will occur. Whether we are shorting stocks or shorting futures, we need to pay some margin. Generally, the margin is 10% of the actual position value. This means that the actual reverse fluctuation we can bear is 10%. Once this limit is exceeded, a liquidation will occur.

How to control stock positions

Positions and buying timing

China’s stock market implements a T+1 trading system, and purchased stocks cannot be sold on the same day. But you can buy it on the same day after selling it. This means stocks bought in the morning carry greater risk. Sometimes, the trend is all the way up in the morning, but in the afternoon the situation may suddenly change and turn down. We must take this into full consideration when controlling our positions. Even if a good buying opportunity appears in the morning, you should reduce your position additionally; and when a buying opportunity appears in the afternoon, you can increase your position appropriately. When a selling opportunity appears in the morning, you must resolutely reduce your position, because if you are really optimistic about this stock, there will be opportunities to buy at low prices later.

It can be seen from the above analysis that position control is a dynamic and continuous process, and positions need to be adjusted at any time according to the trends of the market and individual stocks. This is definitely tiring, but it can effectively control risks and achieve steady profits.

Positions and trends

The trends of stocks in days are roughly divided into three types: sideways, rising and falling. When a stock trades sideways, it means both upside and downside are possible. The average position can be roughly 50%. If the stock rises, you can increase the average position as appropriate. The more obvious the rise, the higher the average position. When a stock falls, it is necessary to reduce the average position as appropriate. The greater the decline, the lower the position.

Positions and stock characteristics

The characteristics of each stock are different. They are also rising, some rising fast, some rising slowly; some fluctuations are large, and some fluctuations are small. For stocks with high volatility and active stocks, on the K-line chart, the prices of two consecutive days overlap more. Whether it is rising or falling, there are opportunities for short-term trading, and the position fluctuations can be larger. On the contrary, if the stock price is inactive, the fluctuations are small, and there is no short-term opportunity, then when the stock price rises, you can lock the position or gradually increase the position, but when the stock price falls, you should resolutely short the position.

Will a full stock position result in a liquidation?

Liquidation refers to a situation in which the customer’s equity in an investor’s margin account becomes negative under certain special conditions. In the A-share market, investors will not be liquidated when conducting ordinary transactions. Even if the stock price drops and investors suffer huge losses, as long as investors do not actively sell the stock, they will continue to hold the stock. Of course, if the company that an investor purchases goes bankrupt and the investor applies for compensation, the listed company will make corresponding compensation based on the stocks it holds.

Investors conduct margin trading, that is, borrow funds from securities companies to buy a certain stock. For risk considerations, securities companies will agree with investors on a liquidation line. That is, when the stock price falls and the loss reaches the liquidation line, the securities company will remind investors to add margin. If investors add margin, they can maintain their losses. Then there will be no liquidation; if investors do not add margin, there will be liquidation, that is, forced liquidation by the securities company.