Lose more than initial investment

[kabs13]

Hi guys, new here and about to start Spread betting but I've got a basic question.

Lots of sites tell me that I can lose more than my initial deposit while spread betting. Could anyone explain how this works? If there is no money left in my account then theres no way for the spread bet company to get more money from me is there? So the maximum I could lose is all the money in my account?

Or could I owe the company money?

Pretty confused about this.

 

[Jason101]

Absolutely you can owe them more money than is in your account. (i.e. they are issuing you with credit.)
In some extreme cases much much more.

As they see fit, they can choose to let your losses build up or to scale out or close any of your trades.(not necessary the trades you would choose.)
This will depend on their policy and how recoverable they believe the debt is from you.

Some companies will offer accounts which limit your loss to your account.
These companies will usually offer these accounts by only accepting guaranteed stops in the account, which is good for peace of mind but your charges in the form of the spread will cost you more. This higher spread becomes less important the higher the time frame you trade.

 

[Jason101]

Just read this and thought it a great if not an unusual example. Showing the recovering the debt as well.

Boy, 5, made £50,000 loss on spread-betting website Spreadex | Metro.co.uk

 

[e_dash]

Just read this and thought it a great if not an unusual example. Showing the recovering the debt as well.

Boy, 5, made £50,000 loss on spread-betting website Spreadex | Metro.co.uk

Interesting. I wonder if the kid actually was to blame though

Just out of interest, how does the margin factor into this? Is it just a guaranteed "deposit" of funds for the SB company in case someone tries to bail with their funds on a losing position?

 

[Jason101]

Interesting. I wonder if the kid actually was to blame though

Just out of interest, how does the margin factor into this? Is it just a guaranteed "deposit" of funds for the SB company in case someone tries to bail with their funds on a losing position?

I bet the SB co. would not have let him keep it if the 5 year old made £50k instead.

As to the margin on these guaranteed accounts, what they seem to do is have no actual margin, but they have a much larger minimum stop distance which can vary with volatility.

 

[Splitlink]

Hi guys, new here and about to start Spread betting but I've got a basic question.

Lots of sites tell me that I can lose more than my initial deposit while spread betting. Could anyone explain how this works? If there is no money left in my account then theres no way for the spread bet company to get more money from me is there? So the maximum I could lose is all the money in my account?

Or could I owe the company money?

Pretty confused about this.

You could use guaranteed stops. I don't, myself, but they are an option. . I have no credit availability. I don't agree with it. What's in the account is what is at risk.

I think that it is something one never knows until it happens to you, but I control my account size according to what I think that it should be for the betting that I take on.

 

[LOTONtech]

Hi Kabs13,

Suppose you bet £10-per-point on Big Bank plc priced at 100p-per-share. Your total risk, if it goes bust overnight, is £1,000. To place the trade in the first place, the SB company might have asked you for a margin deposit of only 20%, i.e. £200, but they'll want the extra £800 from you if it does go bust.

It's like buying a £100,000 house using a deposit of only £20,000 and a mortgage for the remaining £80,000. If the house burns down and is not insured, you will still owe the bank the £80,000 of the loss that you hadn't pre-funded with your £20,000 deposit.

I hope this helps.

 

[Splitlink]

Hi Kabs13,

Suppose you bet £10-per-point on Big Bank plc priced at 100p-per-share. Your total risk, if it goes bust overnight, is £1,000. To place the trade in the first place, the SB company might have asked you for a margin deposit of only 20%, i.e. £200, but they'll want the extra £800 from you if it does go bust.

It's like buying a £100,000 house using a deposit of only £20,000 and a mortgage for the remaining £80,000. If the house burns down and is not insured, you will still owe the bank the £80,000 of the loss that you hadn't pre-funded with your £20,000 deposit.

I hope this helps.

I think that there is more to the question than that. If the trader is like myself, one that does not want credit, does the SB company close the trade when there is no money left in the account? Personally, I think that that level of safety should be built into all contracts unless there is an agreed credit amount.

 

[CoolerKing]

No, in that case you should only place trades of such a point value that should the worst happen your total account balance will cover the loss.

Unfortunately this will limit you massively.

For instance you would not be able to bet on the price of copper (35,000 points) or Forex...

 

[Splitlink]

Well, that means that you would soon get cleaned out, believe me.

I already protect, as I am sure that most do, by managing their trading with stop protection. The object of my post was, really, to get some confirmation from an SB firm as to whether they closed the trade before it goes into a negative position when, and if, a stop was to fail.

This has happened to me and I have been stopped . This can happen when the trader is, perhaps, waiting for funds and, meanwhile, trading with all that he has left in his account and his mrgin is close to his balance.

 

[CoolerKing]

I not saying you won't.

But leverage works both ways.

 

[Splitlink]

I not saying you won't.

But leverage works both ways.

You had an unpleasant experience with Facebook last week because you had no stop. If I remember correctly you had several thousand in your account , but although you had a nasty weekend, would the firm have allowed you to go into a negative position before stopping you? Allowing a client to owe money is a pain in the backside for a SB firm. It has to be reclaimed because allowing a client to get away with it makes a firm look a soft touch. Far better to close the position right on his zero position, IMO. Saves a lot of trouble for both.

 

[CoolerKing]

I did yes - through lack of stop loss. A rookie mistake.

But I was negative about £3000. The only thing that saved me was Morgan Stanley buying the stock at $38. IG only scaled back my open positions not close me completely.

My point is simply if you want to leverage your own deposit then you need to assume the risk otherwise you are essentially fixed odds betting with an interest free loan with zero risk other than your stake.

 

[Splitlink]

I did yes - through lack of stop loss. A rookie mistake.

But I was negative about £3000. The only thing that saved me was Morgan Stanley buying the stock at $38. IG only scaled back my open positions not close me completely.

My point is simply if you want to leverage your own deposit then you need to assume the risk otherwise you are essentially fixed odds betting with an interest free loan with zero risk other than your stake.

You are looking at it from a different angle----from theirs, if you don't mind me saying so!

You should look at it from your own!

They asked me if I needed credit and to apply for it, if I did. I said no. I accept the fact that there may be an unexpected swing in an instrument that could take everyone by surprise but, all things being normal, with them having time to do it, I would expect to be stopped out if I went below my margin.

If you were given margin on credit, that would be a different thing, but it is all a matter of a normal margin call. If you they don't give you one, they should have done, because that means that you have little money left and your trade should be closed. Letting you go into a negative position is unethical on their part unless you have a credit agreement.

 

[capitalspreads]

you do not have to go down the rout of guaranteed stops

capital spreads applies stops to your account but they are not guaranteed .

theoretically you can lose more than you have on your account but there must be some serious gapping in your market for u to end up owing money (and you can use Gteed Stops if you wish)

but in reality in the finacial markets (especially in leveraged products) a client must accept that there is the possibility of losing substantially more than he put down. Spread Betting is a far more risk averse product than FX or Futures trading simply because the SB companies (in general) have no interest in chasing after client losses and so apply quite a few triggers to avoid the situation.

whether you believe the 5 yr old 3 day trading story or not (especially as Sp****ex has a mandatry log out at 0400 in the morning) in reality it is difficult to lose much more than has been deposited. Although heavy betting on low cap mining/gaming/exploration stocks is always a favorite method!