Forced selling

Selling because you have to rather than because you chose to - triggered by a lender, a redemption request, or an unrelated need for cash.

Example

A private stake carried at $100,000 realises $70,000 because the seller needs the money now and the buyer knows it.

Important

Forced selling is the main route by which a temporary decline becomes a permanent loss, and it is caused by the structure of your finances rather than by anything the asset did.

Related terms

  • Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.
  • Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.
  • Margin call — A demand from a lender for more cash or collateral because the value of a leveraged position has fallen far enough that the equity in it is below the required level.

Lessons that explain it

  • Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
  • Leverage: the same asset, a different outcome — Borrowing to invest does not change what you own. It changes how far the asset can fall before the decision is taken out of your hands. (11 min)
  • Illiquidity: when you cannot get out — A price you cannot transact at is a quote, not a value. The losses here come from needing money at a moment when the asset will not give it back. (9 min)
  • Leverage runs both ways, the round trip costs six per cent, and selling takes months — A mortgage multiplies the price move by four in either direction. The transaction costs are fifty times a broad fund's. And the exit is measured in months, at a price you negotiate rather than accept. (13 min)

All 578 terms in the Investing glossary