Published On: Tue, Sep 6th, 2016

Is Negative Balance Protection Important for Long-term Investors?

When choosing a broker, there are certain policies and services that you want out for, these are important and will save you money, time and energy in the long run.

Is Negative Balance Protection Important for Long-term Investors?

One such policy is Negative Balance Protection.

Because of the unpredictability of the market, often times traders can find that they have a negative balance, meaning they owe their broker money.

This is where Negative Balance Protection comes in, it covers you so that in the case of a major market change, you do not suffer any major losses and can even end up saving money. If you aren’t already registered with a broker or are looking to switch, check out this list of negative balance protection brokers.

Often times, Negative Balance Protection (NBP) comes in handy when traders are trading with high leverage. Because some markets are volatile and may show promise one moment and despair the next, it can cause traders to lose. A lot.

An example would be if you trade at a leverage of 100:1, you could stand to earn $10,000 out of  $100 however if market goes south, you could lose $10,000. Many times traders lose more than their capital thus resulting in a negative balance which affects them in a multitude of ways. NBP would cover them and prevent them from having to pay that $10,000 to their broker.

Negative Balance Protection does not only come in handy during cases such as the one mentioned above. Often times major political and economic changes can cause a drastic shift in the market such as this year’s Brexit.

How Negative Balance Protection can Help

If you are a long term investor, someone who buys a financial instrument with plans to hold it over a year, and you invested in the British Pound then the Brexit, which caused the British Pound to drop to $1.3224  against the dollar, an all time low in 31 years since its drop in 1985, would have negatively affected you.

Not only did the British Pound suffer after Brexit but so did numerous other industries as the market tried to react to what many did not expect to happen, Britain leaving the UK.

Reports say that an estimated 3 trillion dollars was lost after Brexit.

Because of such major loss, your trading balance could quickly move from positive to negative.

In situations like this where many people can suffer discouraging and quite frankly devastating financial losses, Negative Balance Protection no longer seems like a nice service. But rather a necessity for any trader no matter their experience and if they are a long term or a short term investor.

At the end of the day things happen and the market changes, sometimes this works in your favor and other times it does not. However no matter what the situation you need to ensure you are protected from devastating losses and that when things such as the Brexit occur, you can walk away with minimal damage if any at all.