What does "Get Liquidated" mean? Understand it in one minute to avoid big pitfalls!

Whenever the market experiences significant fluctuations, it is common to hear about many investors getting liquidated. Liquidation often comes with enormous losses, meaning that your funds and investment targets may become worthless, and you could even be left with a debt.

Therefore, it is necessary for us to deeply understand the meaning of Get Liquidated and its occurrence mechanism in order to timely avoid risks.

Definition of Get Liquidated

Before discussing Get Liquidated, let's first understand the concept of “closing a position.” Closing a position can be divided into two types: active closing and passive closing.

Active closing of positions is usually used for taking profits or cutting losses, and it is the investor's own decision to sell the financial products in hand.

Passive liquidation, also known as forced liquidation or Get Liquidated, refers to the forced sale of financial products in an account. The financial products here may be stocks, futures, or other derivatives.

For example, suppose you purchased a certain stock but were forced to sell it without issuing a sell order; this is experiencing Get Liquidated.

Case Description

Suppose Xiaoming observes that the price of apples in the market is rising, and he also wants to make a profit by buying and selling apples. Xiaoming only has 100 yuan on hand, but he wants to purchase 100 jin of apples (unit price 10 yuan/jin). Therefore, he borrowed 900 yuan from the orchard owner to gather a total of 1000 yuan to buy 100 jin of apples.

If the market price of apples rises to 15 yuan/kg at this time, Xiaoming can earn a profit of 500 yuan (15*100-1000=500), which is equivalent to a 5 times return on the principal.

However, if the price of apples falls to 9 yuan per jin, the total value of the 100 jins of apples in Xiaoming's hands will only be 900 yuan. This means that the 100 yuan Xiaoming invested has been almost completely lost.

If the price of apples continues to fall, the losses will erode the funds that Xiao Ming borrowed from the orchard owner. At this point, the orchard owner will require Xiao Ming to either sell immediately to repay the loan or to add more margin. If Xiao Ming is unwilling to sell at a loss and cannot add funds, the orchard owner will forcibly sell the apples in Xiao Ming's possession to recover the borrowed funds. This situation is known as being forcibly liquidated, or what is referred to as Get Liquidated.

If the price of apples suddenly drops, resulting in a final selling price of 8 yuan per catty, then Xiao Ming not only loses his own 100 yuan but also needs to repay 100 yuan to the orchard owner.

In this metaphor, the apple represents financial products such as stocks and cryptocurrency futures.

Get Liquidated Trigger Conditions

In general, the occurrence of getting liquidated requires the fulfillment of two conditions:

1. A portion of the funds used to purchase financial products is borrowed. The funds owned by the investor are referred to as margin.

2. The account has incurred losses, and the loss amount exceeds the available margin.

For example, if an investor has 100,000 yuan in their trading account, of which 50,000 yuan is their own funds and 50,000 yuan is borrowed. They will use all 100,000 yuan to purchase a certain financial product. At this time, the available margin in the account is only 50,000 yuan. When the loss of that financial product exceeds 50,000 yuan, it may trigger a forced liquidation.

It is important to note that a liquidation will not occur immediately once the loss exceeds the available margin. Usually, a liquidation ratio is set, meaning that a liquidation will only be triggered after the loss exceeds a certain percentage of the available margin.

Of course, if investors can add margin in a timely manner, they can also avoid getting liquidated.

Difference Between Get Liquidated and Loss

Investing in stocks can also lead to losses, even losing all the principal, but there is a fundamental difference between this type of loss and Get Liquidated. Because when using one's own funds to invest in stocks, there is no risk of being forcibly liquidated. Even if a stock is delisted, as long as the investor does not actively sell, they can still continue to hold it.

Whether liquidation occurs in the case of borrowing for stock investment mainly depends on the source of funds.

If the funds are borrowed from financial institutions like Gate, once the liquidation line is reached and the margin is not timely replenished, liquidation will occur.

If the funds are borrowed from friends and family, even if there are severe losses, it will not trigger a Get Liquidated. This is simply a loss caused by improper operation rather than being forced to close a position. The investor only needs to find a way to repay the loan.

Therefore, losses and getting liquidated are different. Getting liquidated is necessarily accompanied by losses, but experiencing losses does not necessarily lead to getting liquidated.

Risk Warning

The consequences of getting liquidated are quite serious. When using borrowed funds to invest in financial products, it is often impossible to recover losses over time when faced with extreme market conditions.

Therefore, we should act within our means and not easily borrow from financial institutions to invest without sufficient strength.

We reiterate that when engaging in high-risk investments, it is best to use your own idle funds. By investing with your own capital, you have the control in your hands. Even if the stocks you invest in incur losses, as long as you do not sell, there is still a chance to recover your losses.

But once liquidation occurs, it is no longer a fluctuation loss, but an actual loss, and the funds will be unrecoverable.

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