While trading contracts for difference (CFDs), traders can often lose more than with what they actually start their trading. This is the reason that regulators want to ensure some sort of mechanism which can help minimize the trader’s risks.
The stop loss is such a device that can help long-term investors to be warranted and very cautious to reduce the losses, if their market assessment goes wrong in any case.
The key reason behind the magnifying losses in CFD transactions is the provision of leverages. A trader usually has a great appeal for CFD leverage, as it can allow them to grab a large stock investing their small amount of money, which is often called the margin money. While leverage can increase the profitability of trading in the financial market, it may also multiply the losses.
Guaranteed Stop Loss
A guaranteed stop loss is essentially a kind of insurance that intends to protect a trader against a terrible loss occurring in the financial market. If there is a huge price difference in the prices of a stock that a trader wants to trade in, the stop loss feature can prove helpful in minimizing losses. When the market is more volatile, the price gap of the stocks can increase more and losses can multiply in its magnitude.
Hence, many CFD brokers allow traders to set a guaranteed stop loss that can help protect their interests in worst case scenarios. Guaranteed stop losses function in the same way like insurance of a house to protect the assets in case of theft, burglary or fire. So, if there is an excessive gap between the stock prices, a trader can seek a protection in the form of stop loss guarantee.
A General Idea of Guaranteed Stop Loss
Guaranteed stop losses are available to the traders often at the discretion of the CFD brokers. All CFD brokers don’t necessarily offer guaranteed stop losses to their traders. In general, guaranteed stop losses can be placed 5-10% away from the current closing position.
There can be time restrictions with respect to placing a guaranteed stop loss. For example, a trader may not be allowed to place a stop loss within one hour of the closing of the stock market. A trader can also be not allowed to place a guaranteed stop loss on stocks that are subject to corporate actions.