Regulators in Australia and many longer term investors are very cautious when it comes to trading contracts for difference (CFDs). The reasons for their caution can be warranted given that traders have the opportunity to lose more than what they start with.
The key reason you can lose more than what you start with comes down to the leverage that contracts for difference (CFDs) give you access to. A CFD is almost identical to trading shares, except you need a small amount of money up front called your margin. When trading blue chip stocks like Woolworths you may only require $500 of your money to control $10,000 worth of position.
Greed & Leverage

Given the leverage CFDs give you access to (up to 20 times your starting balance) it is not uncommon for traders or investors to abuse this privilege, especially when greed is involved. You see leverage compounds your returns but unfortunately leverage works against you quickly when you are losing.

It is for this very reason that many CFD brokers have created a stop loss facility that actually guarantee’s you a price to get out, even if the market never traded there.

Insurance on your portfolio

A Guaranteed stop loss (GSL) is a stop loss that is essentially your insurance against a catastrophic loss or large gap in the stock price of the company you are trading. When volatility increases like it did at the start of 2008 you will find stocks gapping constantly as they react from news on the London or US stock market. Given we are a resource heavy stock market, our stocks can also react heavily to news coming from the futures market like Gold, Crude oil or Copper rising or falling significantly.

When the US stock market drops over 350 points (nearly 3%) like it did on the 26th of July 2008, you can expect our market is going to gap down significantly on open. A gap in price is simply the difference between yesterday’s close and today’s open as illustrated in the following candlestick chart.

Essentially the market is a balance between buyers and sellers, demand and supply. A gap down is a result of more sellers or more supply hitting the market and a gap up is a result of increase demand or more buyers flooding in.

Sometimes the gap in price is quite small, say a couple of cents on a $10 stock but sometimes the gap might be considerably like 5% or more. Now couple this with being on the wrong side of the market and using leverage. It doesn’t take Einstein to work out there is going to be some severe losses to your trading account.