My question would be simple: if I mess something up in online Forex really badly, can I lose more money than I deposited? (e.g. lose my house, gain a debt)
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please see my edit– geo1230May 16, 2017 at 11:05
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14It is good of you to understand that Forex "investing" is all about losing money.– Pete B.May 16, 2017 at 11:26
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@PeteB. Indeed, Forex is much more difficult. But why do you believe that you can only lose money. Sure it's difficult, but there are other investing options that are complicated as well.– geo1230May 16, 2017 at 11:37
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Its speculation and timing. Could you get lucky and make money on a few trades? Perhaps. Eventually, however, the whole "house of cards" will come crashing down. You are better off sticking money in an index fund and watching it grow. It isn't really complicated at all. Concentrate on earning through wages, and investing a portion of it.– Pete B.May 16, 2017 at 11:43
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5@geo1230: Like gold and other non-revenue earning "investments", Forex is a zero-sum game, and that only if you ignore trading costs.– MSaltersMay 16, 2017 at 13:00
4 Answers
If you don't use leverage you can't lose more than you invested because you "play" with your own money. But even with leverage when you reach a certain limit (maintenance margin) you will receive a margin call from your broker to add more funds to your account. If you don't comply with this (meaning you don't add funds) the broker will liquidate some of the assets (in this case the currency) and it will restore the balance of the account to meet with his/her maintenance margin. At least, this is valid for assets like stocks and derivatives. Hope it helps!
Edit: I should mention that
- I'm not an expert
- Always be cautious and know what you are doing when investing in the stock market/FX/etc.
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3The margin call and asset liquidation are not perfect protection. If for whatever reason it is impossible to liquidate the asset to repay the margin loan, the broker definitely will attempt to collect the losses from the investor. May 16, 2017 at 18:52
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"If you don't use leverage you can't lose anything because you "play" with your own money" That is just wrong. If somebody living in the USA opens a bank account in GPB and deposits pounds worth 1000USD, and the exchange rate then moves so they are only worth 800USD, that person has lost 200USD, however you look at the situation. Of course most Forex investors (or traders) invest on margin, which is presumably what the OP is asking about. May 16, 2017 at 20:57
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1This should be "can't lose anything more than you invest" May 16, 2017 at 23:30
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It's the same as with equities. If you're just buying foreign currencies to hold, you can't lose more than you invest. But if you're buying derivatives (e.g. forward contracts or spread bets), or borrowing to buy on margin, you can certainly lose more than you invest.
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since it's the same as with equities, then shouldn't he receive a margin call to add funds or liquidate some of the assets? I don't think that he can lose his home or something... I'm not an expert though...– geo1230May 16, 2017 at 10:54
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12@geo1230 Sure, but margin calls are not guarantees. In a rapidly moving market, such as a stock market crash, you can build up a big debt before you (or your broker) can liquidate your position. When a price goes from 40 to 20, it doesn't always hit 30 on the way. May 16, 2017 at 10:55
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3@geo1230 Generally margin calls are received and positions are liquidated if margin is not met. However quite often the rates move so fast that even after margin call and liquidating assets, there is still debt so one has to pump in additional funds.– DheerMay 16, 2017 at 12:27
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@Dheer I think there might be something all these answers are overlooking. My reading of certain Forex literature suggests one isn't really trading in real currency at all, as there are no interest rates being charged or credited in the currency being held or borrowed. As such, my read (could be wrong!) is that this is more like a CFD thing where you are contractually limited in how much you can make or lose. Am I off the mark here?– user12515May 16, 2017 at 17:10
FX is often purchased with leverage by both retail and wholesale speculators on the assumption daily movements are typically more restrained than a number of other asset classes.
When volatility picks up unexpectedly these leveraged accounts can absolutely be wiped out. While these events are relatively rare, one happened as recently as 2016 when the Swiss National Bank unleashed the Swiss Franc from its Euro mooring.
You can read about it here: http://www.reuters.com/article/us-swiss-snb-brokers-idUSKBN0KP1EH20150116
Contrary to what other people said I believe that even without leverage you can lose more that you invest when you short a FX. Why? because the amount it can go down is alwasy limited to zero but it can, potentially, go up without limit.
See This question for a mored detailed information.
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In ordinary Forex you can put SELL orders and you may not feel like working with a derivate at all. In fact a BUY in one currency is a SELL in other. It all depends on the currency that your account currency.– borjabMay 17, 2017 at 11:20