Can You Lose More Than You Invest In CFDs?

By Orbex

Ideally, this question would have a single-word answer: No.

If you have a responsible broker, that’s pretty much it. But, things with the forex markets are always a little more complicated than they should be. And there are some things to keep in mind!

Retail trading of financial instruments is different than your usual buying and selling of goods. This adds a level of sophistication.

So, to understand the risks associated with forex trading, we have to take a closer look at the practical impact of CFDs and leverage.

Let’s Talk CFDs

A Contract for Difference (CFD) is a more advanced trading vehicle. And, because of that, it’s not allowed in the US.

Unlike with traditional trading in, for example, a bank, where you buy and sell a particular asset such as currency, CFDs allow you to trade on a price movement without actually having to buy the asset.

Basically, this means you are trading on whether the underlying asset will go up or down, without actually buying or selling the asset.

To do this, you always have to have a counterpart. That’s someone else who thinks the market will go the other way, usually.

For you to sell, there has to be someone who wants to buy. The job of the forex broker in this equation is to match people who want to buy CFDs with people who want to sell them.

Then There is Leverage

Since these FX traders generally want to take advantage of relatively small price movements, they want to trade larger sums to make the trade worthwhile.

This is the second function of brokers, which is to provide liquidity for leverage. But leverage means you are borrowing! And if you lose more than you have, you could be at risk of having a negative balance and owe more than you deposited.

Responsible, regulated brokers will manage the liquidity conditions and margin requirements to ensure you get closed out of any trade that might lead to losing more than you have invested.

So, ahead of high volatility times, brokers will often restrict forex trading and margin for a period of time. This is to protect their clients.

Can Things Go Wrong?

Leverage in CFDs means that it is possible to lose more than you deposit – if you don’t have a responsible broker.hahah

We can’t emphasize how important it is to trade with a regulated broker with a good reputation. Under virtually all normal circumstances you will be protected from excess loss. However, at the end of the day, you are responsible for your own trading. So, of course, a forex broker can’t protect you from taking excessive risks.

Please trade responsibly!

In very unlikely circumstances, the market can be so affected by an event that even the broker is overwhelmed.

Rember, most of the money that is being traded with CFDs is the forex brokers’. So, if there is an event like the Black Swan Franc, it can blow out even the broker’s liquidity, and it can go bankrupt. In that case, you could lose most, if not all, of your deposited funds.

Again, having a responsible, regulated forex broker which manages its resources adequately, will help prevent this from happening. In the end, retail forex trading is all about risk management.

So the more responsible a broker is, the better it will be at handling risks and black swan events!

In summary, it is technically possible to lose more than you put in. However, you can virtually prevent that from happening by working with a responsible, established, regulated forex broker.

By Orbex