All Share (J203) = 89 062
Rand / Dollar = 18.40
Rand / Pound = 23.22
Rand / Euro = 19.23
Gold (usd/oz) = 2 932.62
Platinum (usd/oz) = 975.50
Brent (usd/barrel) = 76.03
Trade +10,000 CFDs with Tight Raw Spreads. – Trade Now!

Negative Balance Protection Explained

Negative Balance Protection Explained

What is negative balance protection (NBP)?

Negative balance protection (NBP) is a method used by brokerage firms to ensure that traders with losing positions do not lose more money than the deposit in their trading account.

 

Types of trading in which NBP is applied

NBP is mainly used in the buying and selling (trading) of leveraged products such as forex, contracts for difference (CFDs), and options.

  • Forex trading is the trading of one currency of a country for the currency of another country. For example: British pounds (GBP) are traded for U.S. dollars (USD). Forex trading is also known as foreign exchange trading or FX trading.
  • CFD trading allows traders to speculate on future price movements of certain securities, commodities, indices, and currencies.

CFDs are referred to as financial derivatives, meaning their values are based on underlying assets, such as securities (like ordinary shares of public companies), commodities (such as oil and gold), stock indices (like the Dow Jones Industrial Average (DJIA) and the index of the Johannesburg Stock Exchange, the JSE All Share Index (ALSI)), and currencies (such as the euro and Japanese yen).

  • Options trading refers to the trading of options, which are financial derivatives that give traders the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and certain date in the future.

Although, negative balance protection is also used in the trading of securities, such as the shares of public companies.

 

Why is negative balance protection used in the trading of leverage products?

Leveraged products, such as forex, CFDs, and options, allow traders greater exposure to a particular financial market without increasing the amount of money they have deposited (their capital investment) in their trading accounts.

To start trading in financial securities and forex, a trader is required to open a trading account, also called a brokerage account, with a broker or brokerage firm.

Typically, when opening a trading account, a trader must choose between a cash account or a margin account.

Trading with cash accounts, traders are obliged to have the funds available at the time of the execution of a transaction.

A margin account allows a trader to trade with a significant amount of money in a particular financial market, such as the forex market, with only a relatively small margin deposit in his/her trading account. The margin deposit is also called the initial margin.

Trading with a margin account is referred to as leverage.

Express differently, a margin deposit refers to the initial amount a brokerage firm requires a trader to deposit in order to open a leveraged trading position.

Essentially, a margin account allows a trader to borrow a certain percentage of the purchase price from the broker/brokerage firm. The margin requirements are calculated by the brokerage’s margin system, indicating a trader’s leverage.

For instance, if the margin requirement is 2%, the leverage of the trader is 50:1, and if the margin requirement is 10%, the leverage is 10:1.

For example, if a trader has R10 000 available in his or her CFD trading account and is allowed leverage of 10% (10:1), he or she has R10 available for every R1 in his/her margin account. Put in other words, the trader is allowed to trade up to R100 000 (R10 000 x R10). This implies that the trader owes the brokerage R90 000 (R100 000 – R10 000).

Using leverage and trading on margin has the potential to increase a trader’s profits considerably when the particular market moves in his or her favour.

However, margin trading can also cause substantial losses when the trader’s margin deposit has fallen below the minimum requirement, compelling the broker to make a margin call, requiring the trader to add more money to the margin account in order to cover any more potential losses.

If a trader is unable to fund his/her account with a maintenance margin, his or her positions (short or long) will be closed by the broker, and the trader will be accountable for the loss. This means the trader will owe money to the broker. (The maintenance margin is the amount of money a trader must have on deposit in his/her account to avoid the closing of positions by the broker.)

This is where negative balance protection comes into play, which is a benefit offered by trusted brokerage firms, protecting traders from losing more money than the deposit in their trading account.

 

Negative balance protection (NBP) explained

Negative balance protection (NBP) is an automated adjustment of a trader’s account balance to zero when it goes into the red (becomes negative) after a stop out.

A stop-out is a sign that all the active positions held by a trader in the market will be closed automatically by the broker as the margin level (margin requirements) of the trader are too low to maintain the open positions.

NBP is a benefit and safeguards provided by some brokers to prevent traders from owing a negative balance to a broker. NBP is also provided at no cost.

 

Example of negative balance protection

  • CFDs trading

Trader Pete has a margin deposit of R1 000 (ZAR) in his CFD trading account with a margin percentage of 5%, allowing him leverage of 20:1 and a position worth R20 000 (ZAR). Volatility in the market triggers a drop of 20% in his position.

 

Pete’s position without NBP

Due to the leverage, Pete will sustain a loss of R4 000 (ZAR) (R20 000 x 20%), or 400% of his deposit of R1 000 (ZAR) (400% x R1 000 = R4 000). This means that Pete will not be able to cover his losses with his R1 000 (ZAR) deposit, and he will owe his broker R3 000 (ZAR) (R4 000 – R1 000).

 

Pete’s position with NBP offered by his broker

The loss sustained by Pete cannot exceed the margin deposit of R1 000. Hence, he will only lose his original deposit and his broker will remove the negative balance of R3 000 (ZAR).

 

  • Trading shares of public companies

Sarah decides to deposit R30 000 (ZAR) in her margin account to invest in company AA, purchasing shares with 5:1 leverage, which is a margin percentage of 20%. This provides her a position of R150 000 (ZAR) (R30 000 x 5).

A press release by company AA causes the price to drastically fall by 5% beyond Sarah’s margin call close-out level. As a result, Sarah suffers a 25% loss due to leverage, which amounts to a total loss of R37 500 (ZAR) (R150 000 x 25%).

 

Sarah’s position without the benefit of NBP

The balance of Sarah’s margin account is now in the red by R7 500 (ZAR) (R37 500 – R30 000) which has to be paid back to her broker.

 

Sarah’s position when her broker provided NBP

Sarah is not required to pay R7 500 (ZAR) to her broker because it will be cancelled by the broker. However, she still suffers a loss of R30 000, which is still a significant amount.

 

Brokers providing negative balance protection (NBP)

Unfortunately, not every broker or brokerage firm provides negative balance protection. In addition, some brokers who offer NBP are not trustworthy and use it only as a buzzword to lure novice traders to use their services.

Therefore, when looking for a broker, be aware of the difference between brokers that just pretend the offer NBP and those that actually guarantee their NBP. To separate the wheat from the chaff, evaluate a broker’s history and determine how long the broker has been in business.

Typically, a broker in good standing has sufficient funds to guarantee margin calls, saving clients from going into debt.

Furthermore, look out for brokers who only provide NBP for a trial period as a strategy to attract new traders. Once the test period expires, the trader will be responsible for any negative balances in his/her trading account.

Contrarily, brokers who are trustworthy and reliable offer unrestricted NBP to all their traders and are not trying to gain profit from a trader’s debt.

When a broker provides negative balance protection, it signals that they want to invest in the success of traders, making them reliable strategic partners in the successful trading of their clients, whether it be forex, CFDs, options, or securities trading.

For more information, see the list compiled by SA Shares of the ’22 Best Forex Brokers with Negative Balance Protection – (Reviewed) 2025.’

 

Advantages of negative balance protection

  • It is an additional safeguard against market volatility.
  • Prevents traders from accumulating unpayable debts with their broker.
  • Enables traders to manage risk.
  • Ensures that traders with losing positions do not finish with a negative balance in their trading account.
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Written by:

Louis Schoeman

Edited by:

Skerdian Meta

Fact checked by:

Arslan Butt

Updated:

January 15, 2022

Written by:

Louis Schoeman

Featured SA Shares Writer and Forex Analyst.

I am an expert in brokerage safety, adept at spotting scam brokers in mere seconds. My guidance, rooted in my firsthand experience with brokers and an in-depth understanding of the regulatory framework, has safeguarded hundreds of users from fraudulent brokerage activities.

Edited by:

Skerdian Meta

Leading Analyst

Skerdian Meta FXL’s Heading Analyst is a professional Forex trader and market analyst and has been actively engaged in market analysis for the past 10 years. Before becoming our leading analyst, Skerdian served as a trader and market analyst at Saxo Bank’s local branch, Aksioner, the forex division and traded small investor’s funds for two years.

Fact checked by:

Arslan Butt

Commodities & Indices Analyst

Arslan Butt, a financial expert with an MBA in Behavioral Finance, leads commodities and indices analysis. His experience as a senior analyst and market knowledge (including day trading) fuel his insightful work on cryptocurrency and forex markets, published in respected outlets like ForexCrunch.

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