Negative equity

Just a quick question that a newbie asked me and I couldn't answer it.

Do spreadbetting firms allow your account to run into negative equity, where you owe money to them after a bad trade? Do you not have to maintain a minimum account balance or they close your position ?

This happened to a friend of mine, only £50 or so but it could have been worse . I thought that this type of activity was regulated by the FSA .

Citizen2007 said:

Just a quick question that a newbie asked me and I couldn't answer it.

Do spreadbetting firms allow your account to run into negative equity, where you owe money to them after a bad trade? Do you not have to maintain a minimum account balance or they close your position ?

This happened to a friend of mine, only £50 or so but it could have been worse . I thought that this type of activity was regulated by the FSA .

Click to expand...

They try and stop it, but I don't think any of them will guarantee not to let it go into negative equity unless you pay for a guaranteed stop. Some are more aggressive at cutting positions than others, which can be a double edged sword - cutting a trade as soon as you go 1p on margin call due to a market spike is not necessarily what you want.

All the UK based ones are FSA regulated, but I'm not aware of any FSA rules which mean the SB has to underwrite client losses above the amount they deposit.

Citizen2007 said:

Just a quick question that a newbie asked me and I couldn't answer it.

Do spreadbetting firms allow your account to run into negative equity, where you owe money to them after a bad trade? Do you not have to maintain a minimum account balance or they close your position ?

This happened to a friend of mine, only £50 or so but it could have been worse . I thought that this type of activity was regulated by the FSA .

Click to expand...

The rules on margin ('negative equity') are clearly defined in all the spreadbet T&Cs I've ever seen. Generally they agree to, but are not required to, give you a call to give you a chance to cover your losses, and if you decline or they can't get hold of you they are within their rights to close your position. There's no reason why a spreadbet firm should have to cover a client's losses for them. For what its worth, regular brokers who trade margin product (eg futures), operate in exactly the same way - except someone like Interactive Brokers won't even give you a courtesy call, they'll just close any positions they need to, to get you back in a credit situation. Bottom line is to make sure your account is funded to at least the level of stop losses you have in place - simple account/business management really and certainly not an FSA issue unless you believe the spreadbet firm were doing something underhand (ie the market price didn't really get close to the level where the bet was closed).

Thank you for your replies.