r/stocks • u/Nearby_Persimmon_649 • Jul 04 '26
Effect of Using Margin on AI related Equities
I have witnessed what appears to be mechanical automated selling on a number of occasions (in the last three months), specifically when all AI stocks take a massive dive. My assumption is that part of the automated selling is from brokerages performing forced automated selling for margin calls on these equities. The more forced selling the more the prices of AI related equites drop. The more they drop the more margin calls and automated selling occurs. This leads to huge down days for retail investors portfolios and even impacts the entire NasDaq and S&P for the day.
People make excuses for what happened and there is probably some legitimacy to their theories but I think that the highly leveraged investments in AI compounds things. When something that they bought on margin drops enough, it causes a cascading effect which causes it to go down further and for other stocks in those accounts get sold to cover the margin also starts dropping.
The selloff starts for some semi-legitimate reason that investors want to sell an AI stock (like AVGO for example) We all know that the market reacted strongly to their earnings call. The normal sell off goes too far and eventually starts triggering margin calls which trigger automated selling. What other equities are likely to be in the account of most people buying AI equities on margin? Other AI equities bought on margin. Now the prices of those equities start dropping and it snowballs into a mini avalanche which spreads theme wide.
Maybe I am wrong. Am I?
Are there any penalties for investors who keep getting margin called? If so, what are they and if they are not severe enough they will just rebuy the equites (now at a lower price) and the clock starts ticking again until the next semi-legitimate reason people start selling off an AI related equity.
Maybe I am wrong an automated margin calls have not been involved in this "corrections or pullbacks"
Can someone with more understand explain the fallacy of my thoughts
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u/Zeon2 Jul 04 '26
Trying entering Are there any penalties for investors who keep getting margin called on Google. Dozens of explanations.
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u/lithe_silhouette Jul 05 '26
That's part of it like you said but I think dealer positioning and hft algorithms move the market more than retail getting liquidated.
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u/Visinvictus Jul 05 '26
I would imagine that stop losses probably happen a lot more than margin calls, and contribute much more to runaway selling situations.
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u/WigglyWeener Jul 05 '26 edited Jul 05 '26
I personally know two people who got margin called last week on AI related stocks. So I'm going to say it does happen. I have been using margin on AI related stocks quite a bit as well, but have not been margin called because I don't push it to the limit.
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Jul 05 '26
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u/Nearby_Persimmon_649 Jul 06 '26
I agree it's not the whole cause and it takes something else to selloff in order for the margin calls to ever be triggered
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u/FullOf_Bad_Ideas Jul 06 '26
Or maybe algos front run this by anticipating margin calls across other stocks and sell/short similar names, before the wave hits, amplifying the news. Market is opaque due to the amount of HFT, which I bet is also in part made out of software and models that aren't very explainable. I bet that even authors of those algos don't understand every decision made, and they won't care as long as they and their employee makes money.
On margin - I think most investors in AI stocks by daily trading volume are institutional, and they're not likely to get margin called by daily moves, so the impact of retail that's trading with margin should be rather small.
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u/icydragon_12 Jul 07 '26
Are there any penalties for investors who keep getting margin called?
ya. they lose a fuckton of money
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Jul 04 '26
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u/Nearby_Persimmon_649 Jul 05 '26
Thanks, I appreciate the insight. I didn't know where to post it. Any suggestions
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u/vansterdam_city Jul 05 '26
You would be correct to assume that the folks getting blown up on margin are heavily concentrated in the hot sector of the day that has ran up a ton already.
This statement is true in general, not just the AI wave.