Liquidation price and bankruptcy price are both terms used in trading and investing to indicate the point at which an investor's position becomes unprofitable or unsustainable. However, they are not the same thing.
The liquidation price is the price at which a trader's position is automatically closed by the exchange or broker to prevent further losses. This occurs when the losses on the position reach the maintenance margin level, which is the minimum amount of margin required to keep the position open. The liquidation price is typically set slightly above the maintenance margin level to give the trader some time to add more funds to their account or adjust their position before the position is closed.
On the other hand, the bankruptcy price is the price at which a trader's entire account balance is wiped out. This occurs when the losses on the position exceed the initial margin, which is the amount of collateral required to open the position. If the losses continue to accumulate and the trader's account balance falls below zero, they may be required to add more funds to cover the losses or face potential legal action.
In summary, the liquidation price is the point at which a trader's position is closed to prevent further losses, while the bankruptcy price is the point at which a trader's entire account balance is wiped out. Understanding these terms is important for managing risk and avoiding significant losses in trading and investing.
