Our Guaranteed Stops offer the best possible protection, should the market move sharply against you.
Guaranteed Stops work in the same fashion as Non-Guaranteed Stops; however, Guaranteed Stops put an absolute limit on your liability in the event of a violent market movement, without restricting your profit potential.
When you place a Guaranteed Stop you set a maximum/minimum exit price for your trade. Your position will be closed at exactly your selected level should the market move against you, even if there is a very sharp overnight move.
There is a one-off extra charge, in effect an insurance premium, for this protection. In most cases this is just 0.3% of the underlying transaction value. This protection is not available on all shares, and the size of the position on which we may be able to offer this facility may be limited. We will be happy to advise you of the facilities available for any particular share.
The margin requirement for a trade with a Guaranteed Stop is equal to the amount which would be lost if your Guaranteed Stop were triggered. You will also be required to cover any interest or dividend adjustments.
Example of a Guaranteed Stop
Opening the position
In August, BHP Billiton Ltd was trading in the market at $40.33/40.35. So you buy 1000 shares as a CFD at $40.35, the offer price.
You place your Guaranteed Stop at $40. This means that, if the share price drops sharply, your exit price will be guaranteed at $40. So the most you can lose on the position (excluding interest and commission) is $350 ($40.35, the opening level, minus $40, the stop level = $0.35: $0.35 x 1000 shares = $350).
The standard commission rate on the transaction is 0.1% or $40.35 (1000 shares x $40.35 x 0.1%).The premium for a Guaranteed Stop is also charged when the position is opened. In this case it is 0.3% or just above $121.05 (1000 shares x $40.35 x 0.3%). Remember this is a one-off charge: you can move the level of your Guaranteed Stop at no extra cost.
Triggering the Guaranteed Stop
The stock drops overnight, opening the next day at $38.05. BHP closed the previous day at $40.14, but now opens at $38.05. Your Guaranteed Stop is triggered and your position is closed at $40, even though the market never traded there!
You sell 1000 shares at $40. The commission on the transaction is 0.1% or $40 (1000 shares x $40 x 0.1%). Your gross loss on the trade is calculated as follows:
Gross loss on trade
| Opening level | $40.35 |
| Closing level | $40 |
| Difference | $0.35 |
Gross loss on trade: $0.35 x 1000 = $350
Without the Guaranteed Stop, you would have been lucky in this example to close your position at $38.05, representing a loss on the position of around $2300.
To calculate the net result of the transaction you also have to take into account the commission and premium you have paid for the Guaranteed Stop, plus the interest and dividend adjustments. These adjustments are applied to positions with Guaranteed Stops in exactly the same way as to standard CFD positions (see a detailed example).