Negative balance protection is offered by most of the forex and CFD brokers in Europe and the UK.
As an added protection, UK brokers are required to provide Negative Balance Protection and will credit your account to a zero balance if your account goes into negative. The requirement is introduced on an EU level, but it remains in force, along with the restrictions on leverage and other measures imposed by ESMA in 2018, even after the UK left the Union.
Negative balance protection means that you can’t lose more money than what is on your trading account. Let’s say you deposit €1.000 to your account and you enter a CFD trade with a 5:1 leverage. In this case, you will have a position worth €5.000. If there is market turbulence and your position suddenly drops 25%, you will suffer a €1250 loss, or 125% of your deposited money, due to the leverage. This means your €1.000 balance won’t cover your losses and you would owe the broker €250 – if they didn’t provide negative balance protection.
If you perform the same transaction at a broker that provides negative balance protection, your loss cannot exceed the deposited €1.000 amount.
If you perform the same transaction at a broker that doesn’t provide negative balance protection, you will not only lose €1.000, but you have to pay an extra €250 to the broker.
Negative balance protection offers peace of mind and is definitely a nice to have feature when you choose a broker.
Some brokers provide negative balance protection, some brokers don’t. Among the brokers we reviewed, ActivTrades and Eightcap provide Negative Balance Protection, Alchemy Markets and DeltaStock – still don’t.
If you need further assistance or have any questions related to the Negative Balance Protection, please do not hesitate to contact us.
This article is for information and learning purposes only. Nothing herein shall be construed as an invitation to pursue investment services, an invitation to enter into a transaction and/or investment advice, or a recommendation.