Loading the player...

DEFINITION of 'Forced Selling (Forced Liquidation)'

Forced selling or forced liquidation usually entails the involuntary sale of assets or securities to create liquidity in the event of an uncontrollable or unforeseen situation. Forced selling is normally carried out in reaction to an economic event, personal life change, company regulation, or legal order.

BREAKING DOWN 'Forced Selling (Forced Liquidation)'

In the realm of security investments, forced selling can occur within an investor’s margin account if the investor fails to bring her/his account above the minimum requirements after being issued a margin call. Forced liquidations generally occur after warnings have been issued by the broker, regarding the under-margin situation of an account. Should the account holder choose not to meet the margin requirements, the broker has the right to sell off the current positions.

Examples of Forced Selling Within a Margin Account

The following two examples serve as illustrations of forced selling within a margin account:

  1. If Broker XYZ changes its minimum margin requirement from $1,000 to $2,000, Mary’s margin account with a stock value of $1,500 now falls below the new requirement. Broker XYZ would issue a margin call to Mary to either deposit additional funds or sell some of her open positions to bring her account value up to the required amount. If Mary fails to respond to the margin call, Broker XYZ has the right to sell $500 worth of her current investments.

  2. Mary’s margin account net value is $1,500, which is above her broker’s minimum requirement of $1,000. If her securities perform poorly, and her net value drops $800, her broker would issue a margin call. If Mary fails to respond to the margin call by bringing her delinquent account up to good standing, the broker would force sell her shares in order to reduce leverage risk.

Forced Buy-In (The Opposite of Forced Selling)

The opposite of forced selling in a margin account is a forced buy-in. This occurs in a short seller’s account when the original lender of the shares recalls them or when the broker is no longer able to borrow shares for the shorted position. When a forced buy-in is triggered, shares are bought back to close the short position. The account holder might not be given notice prior to the act.

Forced Selling of Valeant

In the event of a crisis, portfolio managers might be forced to sell certain assets in order to mitigate their losses. For example, some hedge fund managers, who invested hundreds of millions in Valeant Pharmaceuticals, were forced to exit their long positions in Valeant when the stock dive in value in May 2016 triggered redemptions by investors. 

Forced Liquidation of Personal Assets

Forced selling of personal assets can occur when a family member passes away; an estate may be forced to sell the deceased’s assets and properties to pay off debts. In divorce proceedings, assets are also often sold and proceeds divided between both parties. Creditors, under the authority of a court’s writ of execution, can usually force sell a debtor’s assets by auctioning them. The Forced Liquidation Value (FLV) or Forced Sale Value (FSV) is the proceeds received from the sale of these distressed assets, which are used to pay off the debt.

RELATED TERMS
  1. Liquidation Level

    In forex trading, the liquidation level is the point when the ...
  2. Margin Account

    A margin account is a brokerage account in which the broker lends ...
  3. Call Money Rate

    The call money rate is the interest rate on a short-term loan ...
  4. Credit Balance

    In a margin account, A credit balance is the sum of proceeds ...
  5. Federal Call

    A federal call occurs when an investor's margin account lacks ...
  6. Long Market Value

    The long market value is the current market value of the securities ...
Related Articles
  1. Trading

    Discovering the Force Index

    Learn how to measure the power of bulls behind rallies and bears behind declines.
  2. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  3. Trading

    The Force Index For Short- and Medium-Term Trading

    Here are the guidelines for making trading decisions using the force index in both perspectives.
  4. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  5. Trading

    How Forex Brokers Make Money

    Forex brokers set their prices based on commission, spread, or a combination of both. Traders have to be cautious in the thinly regulated forex market.
  6. Investing

    What is a Discount Broker?

    A discount broker is a stockbroker who carries out "buy" and "sell" orders at a reduced commission compared to a full-service broker, but provides no investment advice.
  7. Investing

    Valeant Suffers From Too Much Legal Risk: Wells Fargo (VRX)

    Valeant is still the subject of almost a dozen different government probes, in addition to numerous shareholder lawsuits, making it a significant risk.
RELATED FAQS
  1. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  2. What's the difference between a cash account and a margin account?

    All transactions in a cash account must be made with available cash or long positions; a margin account allows investors ... Read Answer >>
  3. What Does a Share Liquidation in My Account Mean?

    A liquidation occurs when an account's holdings are sold off by the firm where the account was held. Read Answer >>
  4. How long can you short sell for?

    In theory, you could keep a short position open indefinitely, but in practice, a lender can demand you "buy to cover" the ... Read Answer >>
  5. Can a Broker Sell Your Stocks Without Permission?

    In this article, find out if and when it's legal for a broker to sell securities from a customer's account and portfolio ... Read Answer >>
Trading Center