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