Guaranteed Stop Loss

What is Guaranteed stop loss?

Guaranteed stop loss (GSL) is a kind of protection provided by a CFD provider to an investor in order to make sure that the investor is not incurring significant amount of loss due to unfavorable market conditions. The whole idea of guaranteed stop loss is to reduce the negative effects of price gapping. It will provide the necessary protection for the investors regardless of what happens to the original share price.

Understanding the GSL through scenario

Let’s consider a scenario to have a better understanding of the guaranteed stop loss concept. Let’s say you bought the shares of ABC Company for $3.50 per share and placed your stop loss at $3.43 which is 2 percent away from the share price. This means if the price of the share drops to $3.43, your stop loss will be activated and you will be closed out of the trade.

Now let’s assume some unexpected developments occurred overnight which affected ABC Company negatively and in next morning it opened at $3.25. This is known as "gapping". Now in this case you won’t be benefited from your stop loss since these shares never traded at $3.43 but instead fell directly to $3.25, means your stop loss was never triggered.

In order to avoid this from happening, you can go for the “guaranteed stop loss” which will provide the absolute guarantee that you are closed out of the trade at $3.43 regardless of what happens to the original price of the share. However, the CFD firms will charge you a premium to activate this feature.