fge cfds, page-27

I hate to say this but clearly there is a great lesson learned from investing or trading. The cliches never put all you eggs into 1 basket or understand the industry you are investing or whatever people can come up with when the damage is done can sound patronising but others reading these type of post can learn not to make the same mistakes.

I haven't had the the displeasure of a leveraged long cfd position gone to ZERO overnight but at least I bother to understand the mechanics of what destruction over leveraging can do to the capital. So for a 10-1 leverage, margin $1K = $10K position. If position drops 10% you lose the margin ($1K). Need I say more if the position keeps shrinking.

Secondly, stocks don't have an orderly sell down when panic sellers swamp the asking stack at the pre-auctions, the symptom being a big gap down. Unless your broker provide a guaranteed stop loss (cost more than a standard free stop loss in charges and usually each change in level attracts additional charges) a standard SL DO NOT protect your loss. If price gaps down below your SL level, you get out at the next best price of exit. So in the example you protect with SL if value falls below $9K (some SP level. If morning gap down so the current value is say $5K (50% SP destruction) at open, you will lose that $5K value so you will end up losing another $4K on top of the $1K margin)

Thirdly, any margin call, a closed or open position that is below the capital you have in the account, assuming the stock is still trading, will attract a phone call from your broker to see if you want to close out the position or to top up with cash in 24hrs! Failure will effect closure of any position to keep the account in +ve or chase you for owings if non stocks to close out.

So worst case scenario you open a big position that you cannot afford to pay back if the FGE style collapse came into effect, you will have to liquidate any other fix assets to repay your owings. Most people never factor this worst case scenario when they over leverage or thinks guaranteed stop loss is too expensive to bother or not provided by the broker. That is the risk you take. If you don't understand leverage but still expose yourself to a large position you cannot afford to lose then this will be an experience that will burn deep in your memory. Never say never.

Understanding of basic money management should be also at the start of one's investing education especially when using leverage!. Buying standard stock without borrowings is so much safer because you have to cough up the whole amount at purchase so you know what you can afford up front.

Long winded post but should clear up some issues concerning leveraging generally. Caveat emptor