What is Negative Balance Protection?

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What is Negative Balance Protection?

Forex trade and stock trade can be profitable, but they are rife with attendant risks. Situations arise where market volatility prevents you from keeping your account balanced. You can protect yourself from having a negative balance using available standard tools.

An introduction to Negative Balance Protection

Negative balance protection refers to a precautionary measure by a brokerage firms to safeguard their customers. The policy ensures that you, the trader, don’t run into losses exceeding your initial deposit should your account run into negative during trading. When you choose a broker offering negative balance protection, you are not obliged to pay anything should you make a wrong trading move.

What is the history of negative balance protection?

Negative balance protection became prominent following the 2015 Swiss-franc crisis. This is the year the Swiss National Bank stopped trading its currency against the Euro at a fixed rate. What followed was a rapid strengthening of the local currency against the Euro. The aftermath of the lack of a Negative Balance Protection policy was that some investors and retail traders ended up owing massive amounts of cash to brokers, often exceeding their entire life savings. To prevent such an occurrence, you and your broker need to consider how to seriously address the issue. Negative balance protection shifts the responsibility for the losses to the broker.

Regulation: CySEC and FCA

 UK’s financial regulator, the Financial Conduct Authority (FCA), requires all Forex brokers under its jurisdiction to meet the provisions of the Negative Balance Protection policy. The regulator is developing a framework that ensures Forex and CFD brokers commit to cover a certain percentage of exposure risk for investors. FCA will require firms that are not willing to comply with a negative balance protection policy and guaranteed Stop Losses, to use their capital to cover potential risks.

The financial regulatory authority in Cyprus, the Cyprus Securities and Exchange Commission (CySEC), pronounced its position on the matter on 18th September 2017. According to CySEC, protection for firms it oversees can only be instituted on a per-account basis. Consequently, a trader running more than one account with a broker can have funds from a different account cover their negative balance in another account. Nonetheless, no traders account can enter negative territory.  

How Does Negative Balance Protection Work?

Your broker has a facility called margin call that ensures your account balance doesn’t become negative. However, some incredibly fast drastic move can happen, and your broker isn’t able to close your trade immediately. Alternatively, the high speed of the market makes it impossible to execute your stop-loss order.

If the price runs beyond your stop loss or margin call, it causes a loss exceeding your account balance leading to a negative balance. With negative balance protection, your broker overlooks your negative balance and lets your account to begin from zero again.

Suppose you have $10,000 in your account to buy stock on the leverage of 5:1 for a position of $50,000. If the market is volatile and the price drops like 8%, you will incur a 40% loss, meaning you lose $20,000. Under normal circumstances, you would have lost the initial $10,000 and still owe the broker another $10,000. Under negative balance protection, your loss will be limited to only $10,000.

Data analyzing in exchange stock market: the candle chars on display. Analytics price change cryptocurrency BTC.

Factors to Consider When Choosing A NBP Broker

Choosing the best negative balance protection broker can be a bit challenging since the broker needs to suit all your other needs at the same time. However, by exploring several options, you can come out with a sort of a safety net. Some factors to consider include:

Regulation

Ensure that your preferred broker is genuinely licensed and regulated by a respectable regulatory body or commission. Check where the firm is based since different jurisdictions have different financial registration requirements. Licensing and regulation give the necessary insurance against financial issues and internal fraud that the broker might encounter. Regulatory requirements require brokers to keep customer funds and their funds in segregated accounts. 

History

An essential factor you cannot ignore when looking for a negative balance protection broker is their overall reputation and operational history. Choose a broker with a robust financial history; you want to avoid a broker who unnecessarily holds on to your money. Do enough online research to find out other users’ past experiences with the broker. By reading independent reviews, you could come across news releases on sanctions, wrongdoing, or ongoing litigation. Select a broker with at least two years of experience.  

Withdrawal Times

Check what funding methods a broker offers and whether there are any minimum deposit and withdrawal terms. While most brokers allow traders to fund their accounts using wire transfer, credit cards, and bank cheque, you’re advised to check that they have favorable policies. Look for a broker who offers smooth, speedy, and hassle-free deposit and withdrawal processes. 

Best Brokers That Offer Negative Balance Protection

Trading212

Global online broker Trading 212 was founded in 2006 and trades in Forex, stocks, commodities, and indices. You need a minimum deposit of one dollar to register or sign up for a demo account. The broker has different levels to cater to newbies and expert traders.

The award-winning Trading212 is regulated and licensed by reputable organizations, and trades in over 177 currency pairs and 3000 instruments. The broker has a custom-made user-friendly platform as a browser-based App besides mobile Apps for iOS and Windows. Tangible benefits include:

  • Low min deposit
  • Guaranteed stop loss
  • Allows hedging
  • Offers STP
  • Educational resources
  • Customer support in several languages

XTB

XTB was founded in 2002 and offers cryptocurrency, CFDs and Forex trading. This global NBP broker is headquartered in Poland. The firm has won tens of awards and gives traders a choice of over 1,500 trading instruments in over 50 currency pairs. You can enjoy the popular MT4 Forex trading platform in addition to the award-winning Xstation5. Some tangible benefits offered by XTB include:

  • Mobile Apps for iOS and Android
  • Customer support in several languages

Plus500

Founded in 2008, the award-winning worldwide online broker Plus500 specializes in CFD trading. Beginners require a minimum deposit of $100 to start and have the option of signing up for a demo account. The broker features over 2000 trading instruments in at least 100 currency pairs. You can benefit from using the firm’s user-friendly custom trade platform that also comes as a browser-based web App. Plus500 offers benefits like:

  • A free unlimited demo account
  • Several trading options
  • Web trading
  • Mobile trading
  • Desktop trading
  • Supports numerous languages
  • Crypto instruments including BTC, ETH, LTC, NEO, XRP IOTA, Stellar, EOS, Cardano, Tron and Monero

Admiral Markets

Globally recognized Admiral Markets is headquartered in the UK, was founded in 2001 and trades Forex and CFDs. You need a minimum deposit of $200 to begin trading though you can sign up for a free demo account. The firm features 148 instruments and at least 40 currency pairs. The broker offers MT4 and MT5 platforms in addition to Android and iOS mobile Apps. Trading benefits include:

  • Allows scalping
  • Allows hedging
  • Offers STP
  • Demo account
  • Micro account
  • Mini account
  • Standard account
  • ECN account
  • STP account
  • Support in numerous languages

Concluding Thoughts

Forex, CFD, and stock trading on margin comes with some attendant risks and isn’t suitable for everyone. Before you choose a broker, consider your experience, risk appetite, and investment objectives. Since there’s always a possibility that things could go wrong, take advantage of the negative balance protection policy. 

Regrettably, many brokerages don’t offer negative balance protection. Remember, should an extreme situation happen in the market, such a broker won’t cover all your risks. Thankfully, many licensed and regulated brokers offer you this fantastic option. Always check the terms and conditions of brokers before signing up. Negative balance protection is an important selling point as it delivers you from the dangerous line.

What exactly is Negative Balance Protcetion?

This is a precautionary measure taken by brokerage firms to safeguard traders.

Do all brokers offer Negative Balance Protection?

Unfortunately, not all brokers use this importnat trader protection policy. Always read and understand the terms amd conditions relating to a broker before signing up. Always ask specific questions when in doubt.

What is the purpose for Negative Balance Protection?

If your trader account runs to the negative during a trading activity, such as when you make a wrong move, the negative balance protection clause ensures that you don’t lose more money than you have in your account.

Am I expected to pay the broker later when Megative balance protection is triggered on my account?

If your broker supports NBP and adjusts your negative balance to 0, you don’t have to pay the costs associated with fixing it to 0. Your broker covers the amount of negative balance, and you, the trader, don’t need to cover any of its costs.

All this sounds too good to be true, what’s the catch?

Thankfully, there isn’t a catch anywhere. There are no circumstances under which you will owe the broker any money for getting and ajustment after going into a minus balance.

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