CFD Dealing with Guaranteed Stop Losses
The idea behind a guaranteed stop loss is that the CFD broker charges a premium to the trader for guaranteeing to put the stop in place. If any losses are made by a sudden jump in the market, the broker is liable for these.
To better understand the function of a guaranteed stop loss, please read the following example:
A trader decides to purchase a CFD on some stock in Company X, which is currently priced at 1,676p on the London Stock Exchange. He has heard rumours that Company X is close to settling a large lawsuit brought up against them.
He knows that if the law suit is settled it will eliminate a large potential financial burden and the stock price will rise, however if the settlement falls through the stock price may fall drastically. The trader is confident that they will be able to settle the lawsuit, but to ensure that he protects his investment he orders a guaranteed stop loss at 10%.
A couple of weeks later, there is news that Company X was unable to settle the lawsuit, and suddenly the price of the stock drops 15%. Luckily for the trader, he had the stop loss at 10% and since it is guaranteed by the brokerage firm, this is all the loss that he will incur.
