An account liquidation occurs when the holdings of an account are sold off by the brokerage or investment firm where the account was created. In most cases, this is down to satisfy margin requirements. When you sign up for a margin account with a brokerage firm, you grant that the legal right to liquidate your holdings if you are unable to meet the account's requirements.
There are two main brokerage account types: cash accounts and margin accounts. A cash account only allows an investor to purchase securities up to the amount of the cash held in the account. For example, if an account has $10,000 in cash, the account holder will only be able to purchase a maximum of $10,000 worth of stock.
With cash accounts, a brokerage firm does not have the same ability to liquidate unless it is due to an external factor like a personal bankruptcy. A margin account, on the other hand, allows investors to borrow up to 50% of the purchase price of marginable investments (the exact amount varies depending on the investment). Said another way, investors can use margin to purchase potentially double the amount of marginable stocks than they could using cash.
A typical requirement of a margin account is to maintain at least 25% equity, or your own money, of the total market value at any given point. For example, suppose you purchase $10,000 worth of stock with $5,000 of your own money and $5,000 of margin money. If the value of this position were to fall to $7,500, your equity position in the investment falls to $2,500 ($7,500 - $5,000), which represents 33% margin—above the 25% requirement.
However, if the value falls to $6,500, your equity in the position would be reduced to $1,500 ($6,500 - $5,000), which puts your margin at 23%, falling below the minimum margin requirement of 25%. If the account does fall below the minimum maintenance margin level, you will either have to add more money to the account to meet the margin call or your account will be liquidated in part or in full.
In most cases, your brokerage will issue a margin call advising you to add money to your account or close positions until your account reaches the 25% requirement. If you don't take appropriate action, your brokerage will take steps to close open positions until the requirement is met. They can do this without your approval and they may even charge you a commission for the trade. (See also: Margin Trading.)