Loading the player...

DEFINITION of 'Sellout'

A sellout occurs when an investor buying stocks has failed to settle a trade in a timely manner. As a result, the broker can forcibly sell the securities on the investor's behalf.

A sellout is different than a sell-off, which usually occurs within an entire category, such as industry sector, in the public markets. For example, there could be a sell-off in oil stocks if analysts believe that the industry is under pressure from supply tactics in the Middle East, or in potentially new technologies like solar or wind. A sell-off could also occur in an asset class, such as bonds or equities.

BREAKING DOWN 'Sellout'

An example of a sellout is when a broker sells a client’s stock to meet a margin call. A margin call is associated with a margin account. A margin account is a type of brokerage account that allows the broker to loan its customer cash in order to purchase a higher volume or (or more expensive) securities than the customer otherwise would be able to. This tactic is high-risk and allows the customer to use leverage, which has the potential to amplify gains, as well as losses. Because of this, placing bets in margin accounts is generally reserved only for accredited investors, who have both experience and money to lose.

A margin call generally occurs when the broker requests that an investor deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. The minimum margin requirement in 2018, according to FINRA rules, was 25 percent of the current market value of the securities in the account. If a customer fails to pay, the broker may liquidate the securities in the account.

Sellout and the Basics of Brokerages

To understand sellouts, it’s helpful to understand the basics of brokerages. A brokerage company acts as a middleman that connects buyers and sellers to facilitate a transaction. Brokerage companies receive commissions when a transaction has successfully completed. For example, when a trade order for a stock is executed, an investor pays a transaction fee for the brokerage company's efforts to complete the trade. Brokerages can help individuals access the markets in different ways. Since they have far more assets under management (AUM) than most individual investors, brokerages can take large positions in difficult-to-obtain securities like new issue IPOs, secondaries, and/or stakes in private equity firms and make them available to their clients.

RELATED TERMS
  1. Margin Account

    A margin account is a brokerage account in which the broker lends ...
  2. Buying Power

    Buying power is the money an investor has available to buy securities ...
  3. Buying On Margin

    Buying on margin is the purchase of an asset by paying the margin ...
  4. Brokerage Company

    A brokerage company's main responsibility is to be an intermediary ...
  5. Long Market Value

    The long market value is the current market value of the securities ...
  6. Excess Margin Deposit

    An excess margin deposit is cash or equity in a margin trading ...
Related Articles
  1. IPF - Broker

    The Complete Guide to Choosing an Online Stock Broker

    Online stock brokers have made high-risk, high-reward investing available to the broader public.
  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. Retirement

    The Rise of 401(k) Brokerage Accounts

    Many 401(k) plans now allow participants to trade stocks and bonds by offering brokerage accounts inside the tax-deferred plan. Good idea or too risky?
  4. Trading

    Principal trading and agency trading

    Ever wonder what happens behind the scenes when you buy or sell a stock? Read on to find out.
  5. Trading

    Basics of the Mechanics Behind Electronic Trading

    Once associated with shouting traders and wild hand gestures, now statistics and programmers rule.
  6. Managing Wealth

    The Most Expensive Brokerage Accounts For Traders

    A peek into the brokers whose brokerage charges are higher than average in the stock market world.
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 is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
  3. 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 >>
Trading Center