Is It Possible To Lose More Than The Amount You Invested in CFD Trading?December 24, 2020
People who are hesitant about CFD trading will have the same question in mind – Is it possible to lose more than the money you invested in CFD? Ideally, the answer to this is a big ‘NO’. If you have a reputable broker then the odds of failure are totally low. But always remember that trading CFD has a complicated side and there are important things that need to be kept in mind.
Trading CFD is totally different from the usual selling of shares or the selling and buying of goods. But before anything else, you need to understand the risks involved in CFD Trading and how you can counter them to reduce the losses that you may incur. It is also important to understand the fundamentals of trading before you get too excited about the wins and profits.
Understanding CFD Trading
Contracts for Difference or simply called CFD, considered to be a more advanced means of trading, and therefore, it is banned in the US.
Trading in banks is done when you buy or sell a currency. This is totally different in CFD because traders here predict the price movement without actually buying the underlying asset. So basically, what happens here is that the trader anticipates the price movement.
To trade CFD, you need to have a counterpart. That’s when you need a reputable broker to play this part. The broker will act on the other side. This counterpart predicts that the market will take the other side than the one you have predicted.
Leverage in CFD Trading
CFD traders always want to take advantage of every small price movement out there so they can trade with larger sums to make sure that the trade is worthwhile.
This is where the broker comes in handy. Brokers provide liquidity for leverage. But when there’s leverage, it means that you will have to borrow. If it comes a time wherein you lose more than you invested, then the risk of negative balance comes in. This puts you in a tough situation of having a negative balance.
But responsible and regulated brokers work differently. They manage liquidity conditions as well as the margin requirements pretty well to make sure that they close out those trades which could lead traders to have a negative balance in their accounts.
Can things still go wrong?
You’ve already known the power of leverage and how it can make you lose more than the money you have invested. But this will only happen if you choose an irresponsible broker, so there’s not much to worry about.
In every trading discussion out there, the importance of a regulated and responsible broker is always tackled. Under these circumstances, you can be sure that your investment is well protected. But, this does not mean that you will not do anything on your investment. You should play your part especially when it comes to dealing with the risks of trading. At the end of the day, it all boils down on you. A trader must be responsible for his trades at all times.