CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data. *Availability subject to regulation.
CFDs trading and spread betting are popular instruments for trading the financial markets. With trading positions most commonly opened and closed within the same trading session (day trading) or up to a maximum term of usually a few weeks, it is more dynamic than longer term traditional investment in equities, bonds or physical assets. The fact that multiple trade positions can be taken within a short window of time, and that leverage is also available to magnify exposure, means that successful traders can conveniently spread and manage risk. The faster moving nature of trading compared to investing and the potential to quickly accumulate capital if the markets move in a trader’s favour is why so many are attracted to CFDs trading and spread betting.
However, the same factors mean that trading capital can also very quickly be lost. Unlike in the case of traditional investments, CFDs trading and spread betting can, if leverage is used, result in losses that are greater than the initial margin. This characteristic of financial markets trading is why CFDs and spread betting are defined as high-risk instruments. It’s also why many beginner traders are unsuccessful. Many do not manage risk well and burn through their start-up trading capital more quickly than they are able to gain the education and experience required to go on to become a consistently profitable trader.
A trader getting themselves into the position that they owe more in losses than the value of their trading account’s balance is also not good for the broker. The trader may not be able to afford to pay their debt, which would lead to a loss for the broker. Even if the debt can be settled by the trader from other funds the chances are that suffering a significant loss will put them off continuing to trade longer term, which is similarly not in the broker’s interests.
Limited risk trading accounts are a kind of account which both protects beginner traders from themselves while also shielding the broker from traders potentially sustaining a trading loss they are financially unable to cover. More experienced traders might also prefer to trade from a limited risk trading account and beginners will often be directed towards one as a starting point for their trading career.
Trades made from limited risk trading accounts will only be executed once the trader has placed a Guaranteed Stop Loss Order (GSLO) on the trade. GSLOs close off a trade automatically if the market turns against the trade position and a predetermined maximum loss is reached. This loss, or losses if multiple trades are open simultaneously, cannot exceed the balance of the capital held within the limited risk trading account.
This should be the case even if a trade is held overnight. If the market’s opening level is significantly up or down from its closing level, which can happen if a major event takes place after market hours, the trader will still not lose more than where the GSLO was set.
The disadvantage to setting a GSLO is that the trader does not have the option of waiting for the market to turn and reverse losses, even if they are convinced that it will do so. Once the level of the GSLO is touched the trade is closed out and loss realised.
Brokers also tend to charge an additional fee when a GSLO is set on a trade to compensate for the fact that while potential gains are unlimited if the market moves in the direction the trader predicts, losses are limited if they are wrong. However, there are now some brokers who offer special limited risk accounts to new traders where there is no additional fee charged for them setting a GSLO.
IG Markets Ltd are authorised and regulated in the UK by the Financial Conduct Authority. In order to help customers manage their risk, they offer a limited-risk account which provides positions with either a guaranteed stop or trades on markets that are minimal risk. The account does not permit more than a client’s initial deposit to be lost.