Understanding Sellouts

A sellout occurs when assets are forced to be sold. Sometimes, these situations occur because of personal events such as an unforeseen illness, a lawsuit, or a divorce. Firms may be forced to liquidate their assets in the event of a bankruptcy, sometimes at fire sale prices that are below current market value. The point at which a sellout will commence is sometimes known as the liquidation level. Note that the amount of assets sold often will be limited to the value needed to satisfy the short-term obligation that triggered it.

The point of a sellout is to quickly generate cash to satisfy short-term obligations that must be met. As a result, the one forced to sell may not always get the most favorable prices or terms.

In the financial markets, a common cause of sellouts are the margin calls associated with leveraged margin accounts.