Q. How much do Guaranteed Stop Loss orders cost?
A: Most CFD and spread betting providers offer guaranteed stop loss orders. If you intend to use guaranteed stop loss orders in your trading be wary that the charges can vary substantially across brokers and you really need to shop around to find the best value as guaranteed stop loss orders can easily double transaction costs.
Let’s look at the obvious – and not so obvious – costs before we decide whether they are worth it.
Guaranteed Stop Premium
Some spread betting platforms charge a separate premium when you opt to guarantee your stop order. This premium will vary by traded instrument, from 2 points* (times your pounds-per-point stake) for the UK 100 Index to 20 points on the EUR/SEK currency pair. On individual equities, the spread betting company may quote the premium in the form of a percentage such as 1% for UK Mid 250 Rolling Daily shares.
Wider Spread
Some spread betting companies don’t charge a separate premium, but instead they widen the bid-ask spread by an equivalent amount. For example: at the time of writing I can trade BT Group on the Cantor Index platform with a spread of 173.10 – 173.90, but checking the box to guarantee my stop raises my buying price to 175.30.
Greater Minimum Stop Distance
A slightly less obvious cost comes in the form of a greater minimum stop distance. Since the spread betting companies are guaranteeing to stop you out at the price you specify, regardless of how far the market price gaps up or down, it is perhaps understandable that they want to build in an additional margin of safety for themselves.
One provider requires a non-guaranteed stop order to be a minimum of 0.9 points away from the prevailing market price of BAE Systems, and a guaranteed stop order to be at least 14.5 points away. This greater minimum stop distances represent a real cost, but one that you pay (in effect) only if you actually stop out at the greater distance.
Higher Rolling Charges
Some spread betting companies, notably Shorts & Longs, offer ‘free’ guaranteed stops that are mandatory. It sounds great, but the last time I tried it I found that the overnight financing charges on this platform were up to ten times the cost of rolling charges on other platforms. So, at that time at least, those guaranteed stops weren’t exactly free after all.
For instance City Index charges 0.15% for trading UK shares and an additional fee of 0.25% for taking a guaranteed stop loss order. Of course this 0.25% guaranteed stop loss fee is just a start – the premium charge can go up by as much as 1% for trading particularly volatile shares. IG Index’s guaranteed stop loss premium starts at 0.30%.
When working out your maximum amount to risk – the minimum stop loss distance also plays a key role. IG Index requires a minimum stop distance of about 5% to 12.5% depending on the share (in general the more volatile/the smaller the share the bigger stop loss distance required by your broker). In contrast City Index stipulates an all-inclusive policy of 10% for all UK shares.
For the FTSE, IG Index stipulates a minimum stop loss distance of 10 points on the FTSE 100 rolling while CityIndex will not allow stops nearer than 40 points. Brokers also have different charging structures for spread bets on indices – for instance IG Index adds 2 points to the spread on a FTSE 100 daily while City Index the charge on a FTSE rolling trade is 2 X the quantity that you are trading.
So for instance: If you place a £10 a point trade with a guaranteed stop loss at City Index the charge is 10 x 2 = £20. This charge would show on your account statement. IG Index, on the other hand will add 2 points on the FTSE 100 daily so in effect any gains you make would be £20 less or any losses £20 bigger.
Most providers will also allow guaranteed stops of forex trades. The charge for these at City Index is 5 x stake. So if you do a £3 trade the charge is £15.
Are Guaranteed Stops Worth The Cost?
It depends what your trading, and how you’re trading it.
- If you’re diversifying your risk by placing many low-stakes bets on low-priced equities, you probably don’t need to use guaranteed stops at all.
- If you’re betting the farm on a single four-digit stock index or commodity trade, you might not sleep soundly without the peace-of-mind that the guaranteed stop gives you.
- If you’re day trading, any higher rolling charges won’t hit you at all, and if you always use wide stops then the minimum stop distances won’t figure in your cost calculations.
