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.

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.

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.