Funded accounts - what are they and their risks?

Imagine that you want to trade in the forex market but you don't have the required funds to open an account or deposit. What do you do? In such cases, funded accounts could be an option, meaning you are trading with other people’s money. Keep reading to learn what they are, their risks and who should use them.

What are funding accounts?

Funding accounts, also known as funded accounts, offer traders the chance to start trading without making an initial deposit. Instead, a third-party company provides the capital for investing in financial derivatives (typically ranging from 25,000 euros to 150,000). This setup allows individuals to open a trading account without contributing their own funds. However, it's important to note that Skilling does not offer these accounts due to their high-risk nature.

Recently, regulators have received numerous complaints about websites that offer access to funded accounts, hence it's extremely important to be careful when getting into them. These platforms provide the initial deposit and, in return, traders receive a percentage of the profits. To qualify for these accounts, users are required to complete a course (which could cost thousands of euros) that explains the trading rules and pass various tests to demonstrate suitability. These courses often come with a hefty price tag.

In order to evaluate traders' capabilities, the tests are conducted using a trading simulator or demo account. The results are recorded and analysed. Speaking of demo accounts, if you're interested in accessing a free demo account to trade thousands of CFDs (Forex, Crypto, Stocks, etc.), you can register with Skilling through the following link.

Funding accounts vs regular legislated accounts

Funding accounts, which as we've seen offer deposits up to 150,000 euros, require traders to pay a percentage of their profits to the funding company. When withdrawing funds from these accounts, they are taxed as income from work and may be subject to personal income tax.

On the other hand, trading with a regulated broker like Skilling prioritises financial security. Client funds are held in Tier 1 banks and are segregated from the company's funds. Skilling also provides account insurance coverage of up to EUR 1,000,000. Moreover, continuous training in trading is available.

In terms of taxation, trading directly with a broker means potential profits may be subject to capital gains tax depending on your jurisdiction. It's important to understand the specific tax requirements by consulting with your local tax authority to ensure compliance.

Risks of trading accounts

Trading accounts come with certain risks that traders should be aware of. Here are some common risks associated with trading accounts: Market risk: Trading involves the potential for financial losses due to fluctuations in the market. Prices of assets and instruments could change rapidly, leading to potential losses.

1. Volatility risk: Markets can be volatile, meaning prices can fluctuate significantly within a short period. This volatility could lead to unexpected losses if trades are not managed effectively.
2. Leverage risk: Many trading accounts offer leverage, which allows traders to control larger positions with a smaller amount of capital. While leverage could amplify profits, it could also magnify potential losses. Traders must be cautious when using leverage and understand the associated risks.
3. Operational risk: Issues related to trading platforms, technical glitches, or internet connectivity problems can impact trading activities. These operational risks could potentially lead to missed trading opportunities or erroneous transactions.
4. Liquidity risk: Some markets, especially in times of extreme volatility or low trading volumes, may experience reduced liquidity. This could make it difficult to execute trades at desired prices, resulting in slippage or delayed transactions.
5. Psychological risk: Emotions like fear, greed, and impatience can influence trading decisions. Making impulsive or emotionally driven trades could lead to poor outcomes. It's important for traders to manage their emotions and adhere to their trading strategy.
6. Regulatory risk: Changes in regulations or new regulatory requirements could impact trading activities. Traders should stay informed about relevant regulations in their jurisdiction to ensure compliance.
7. Counterparty risk: When trading through a broker or financial institution, there is a risk that the counterparty may default or become insolvent. It's important to choose reputable and well-regulated brokers to mitigate this risk.

Who should use trading accounts?

Trading accounts can be utilised by individuals who are interested in participating in financial markets and engaging in trading activities. Here are some groups of people who may consider using trading accounts: Experienced traders: Seasoned traders with knowledge and experience in analysing markets and executing trades may find trading accounts suitable for their needs. They can leverage their skills to potentially generate gains through market fluctuations.

• Active investors: Individuals who actively monitor and manage their investment portfolios may opt for trading accounts to take advantage of shorter-term trading opportunities. These investors often have a higher risk tolerance and actively seek to capitalise on market movements.
• Day traders: Day traders execute multiple trades within a single day, aiming to gain from short-term price movements. Trading accounts provide the necessary tools and platforms to facilitate frequent buying and selling of financial instruments.
• Speculators: Traders who are willing to take on higher risks in pursuit of potential gains may use trading accounts for speculative purposes. Speculators focus on anticipating price movements rather than long-term investments.
• Financial professionals: Traders working in financial institutions, hedge funds, or investment firms often require trading accounts to execute trades on behalf of their clients. These professionals rely on trading accounts to manage portfolios and implement investment strategies.

Conclusion

As we previously stated above, Skilling does not offer funded accounts. It's also important to note that trading accounts involve risks, and individuals considering using them should have a sound understanding of financial markets, risk management techniques, and the specific instruments they wish to trade.

It's recommended to start with proper education, research, and practice before actively using trading accounts. Skilling is an award winning CFD broker that offers its clients with access to over 1200 different CFD assets. Click here to get started with Skilling.