Can you lose more than you put into a CFD trade?
With CFDs (contracts for difference) due to the leverage that as a trader or speculator you can choose to involve, it is possible to lose more money on a trade than you put on margin in the first place. So yes, CFDs can go negative. It is definitely possible to lose more than your initial investment if price movements go against you. For this reason, it could be said that CFDs are not for everyone. As a trader or speculator in CFDs it’s imperative that you you fully understand the risks involved in using them as financial instruments.
CFD traders tend to only leave their positions open over short time frames, in most cases less than a day. The high leverage that can be involved means that you can put a small amount of your deposit on margin, to gain exposure to price movement on a larger chunk of the underlying asset. Of course this means that you’re exposed if there is a large price movement against your position. The obvious upside is that if the price movement of the underlying asset is in your favour, you can make many times the amount you have on margin for the particular trade.
There are other possible costs and risks that can put your account into the negative. Some brokers levy holding costs, particularly if you hold your position overnight. Also, for most brokers, you must ensure you have enough money on deposit to cover all your margin positions, or risk having some or all of your positions closed out by the broker. This loss of position may end up costing you.
These downsides mean it’s definitely in your interests to learn and consider all the risks involved in trading CFDs to see if it is right for you before opening any account. You could consider opening a demo account (see more on that here) with a broker to test out the risks involved with imaginary funds.
There is strong risk and reward involved with CFDs (contracts for difference), and this is what makes it attractive to astute traders and speculators who have a risk appetite that is suitable for the financial instrument.
