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I live in the UK and I am considering starting to trade on the stock market, having opened an account at a brokerage firm.

I am considering using it to speculate on short term period with leverage. Obviously this is risky and may lead to lose more than originally invested.

In order to mitigate that risk, I was planning to create a limited liability company and to retitle my trading account using the credential of that firm.

The idea is that if my account goes into negative territory, I am not personally liable for reimbursing the broker for the losses beyond my account value.

Do you think this is a viable idea?


EDIT:

My question relates rather to how to protect against so called "flash crashes". It is possible to devise trading risk strategies that account for "ordinary" (normal speed) price changes, but i want to be able to have a protection against very large instant moves (think swiss franc in jan 2015).

  • Regarding your edit: "Dynamic Hedging" by Nassim Nicholas Taleb might contribute something to your idea of hedging tail risk, something that he is noted for addressing. I have not read it nor do I know anything about this web site that provides a preview: scribd.com/doc/50109575/Dynamic-Hedging-Nassim-Taleb – Bob Baerker Aug 7 at 0:00
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Generally I think you will find that financial institutions and other businesses are well aware that people sometimes set up limited companies with the intention, if things go bad, of walking away and leaving them to eat the losses.

You may find that anyone you deal with will require a director to provide a personal guarantee.

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    That basically is the answer. I do that and I do that as sole propietor - any company form that protects my assets would be immediately voided by the requirement of a personal unlimited guarantee DEMANDED by my brokers. No guarantee - no trades. – TomTom Aug 6 at 19:44
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    In the paperwork of your broker. Check the account application forms. Then try to get a new account through for a company doing nothing else and they will kindly inform you that either sign or no play. See, brokerage accounts are not human rights. They can refuse you for being a financial risk. – TomTom Aug 6 at 20:09
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    Agreed that no legitimate financial institution would loan money to an unproven company with no track record that is about to take on a significant amount of risk. If you manage to do this, probably there would be some deceit involved on your part, and if you are particularly nefarious, the bank may even try to 'pierce the corporate veil' and still hold you legally liable for their losses. – Grade 'Eh' Bacon Aug 6 at 20:24
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    @Vincent Related term is moral hazard: en.wikipedia.org/wiki/Moral_hazard Financial companies play the game as a profession, so they are very well guarded from individuals trying to take risks while leaving them with the debt if things go wrong. Being stuck with losses when things go wrong, but only having minimal benefits when things go well is the job for the sucker, and I think you'll find most financial firms are far better at making other people into suckers than being made to play one themselves :) – BrianH Aug 6 at 21:00
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    @Vincent, shareholders have some protection but the directors have a fiducary duty to creditors under the companies act 2006. Businesses you deal with will check your filed accounts and will note that you have a small-business exemption on independent auditing of your accounts etc. It is then that they may decide that they need a personal guarantee signed by a director (or all of them) – RedGrittyBrick Aug 7 at 9:14
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I don't know anything about UK law but even if you can get away with this (and I doubt that), this is a terrible idea.

Your game plan at this point consists of how to lose all of the money that you fund your account with but avoid paying the broker for additional losses. Reality check? Margin is tightly regulated by brokers and except in the most unusual circumstances, they will close out your positions long before your account has lost all of its equity.

Anecdotally, in the US, 90% of wanna be get rich day traders lose money. I doubt that it's much different in the UK. And to make matters worse, you have little to no experience --> "I am considering starting to trade on the stock market." What's wrong with this picture?

My opinion isn't based on an uninformed fear based belief that trading is bad. I have done it for 20 years, including significant use of leverage at times.

  • thanks for your reply. My question relates rather to how to protect against so called "flash crashes". It is possible to devise trading risk strategies that account for "ordinary" (normal speed) price changes, but i want to be able to have a protection against very large instant moves (think swiss franc in jan 2015). – Vincent Aug 6 at 16:56
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    Flash crashes and tail risk can be protected against by owning negative delta positions (pairs trading, options, inverse ETFs, etc.). The negative delta will allow to you capitalize on and/or ride out an adverse moves. In varying degrees, these are complex sophisticated strategies that require a lot of of financial literacy and experience. – Bob Baerker Aug 6 at 17:05
  • yes and the options and other insurances also have a cost. Hence my willing of exploring other alleys such as smaller and insulated account(s). Keen on drawing from your knowledge if you have ever come across such a consideration and why it couldn't be an alternative to traditional hedging. – Vincent Aug 6 at 17:29
  • In general, hedging has a cost though there are ways to hedge at no cost. If you're hedging against tail risk wipe out, the hedging cost is insignificant. For example, if you buy 2x shares at $100 then wipe out is at $50. $50 strike options are dirt cheap. And while I can't provide details, hedged portfolios (in the US) eligible for portfolio margin are allowed higher leverage (if offered by the broker). – Bob Baerker Aug 6 at 18:44
  • Thanks Bob, insigthful comment. Will check it but probably hedging futures or CFD in such way would have non trivial costs (10x, 20x leverage, opposed to your 2x example?). Again I'm a bit green regarding those matters. – Vincent Aug 6 at 21:16

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