Deposit Bonuses: The Strings Attached to Free Money

[Fairman]

Deposit Bonuses: The Strings Attached to Free Money

Some brokers offer bonuses of 20, 50, or even 100 percent on deposits. The offers are tempting. The conditions are what matter.

Typically, bonus funds are not withdrawable. They exist as extra margin, and the broker often requires you to trade a certain volume, such as a number of standard lots, before the bonus or profits derived from it can be withdrawn. The volume requirement can be large relative to your account, pushing you to trade more than your plan suggests.

Some terms state that withdrawing any of your own deposit cancels the bonus, along with profits earned using it. Others restrict strategies or limit the maximum leverage while the bonus is active.

The effect on behavior is the real danger. A larger apparent balance encourages bigger positions, and requirements to hit volume targets encourage overtrading. Both increase risk and costs.

From the broker's perspective, bonuses attract deposits and trading volume, since volume generates spread revenue. They also create friction at withdrawal.

Regulators in several jurisdictions have restricted or banned certain bonuses for retail clients, which tells you something about concerns.

If you are tempted, read the full terms, calculate the volume needed, and estimate the spread cost of generating it. Often the cost exceeds the bonus.

A broker with good conditions rarely needs to bribe customers.

Practical step: take a bonus offer you have seen and calculate the trading volume required and the cost in spreads of reaching it.

[Fairman]

Common catch: the bonus counts as equity for margin, but if you hit a drawdown the broker can remove it, and suddenly your margin level drops without any price move. Read the bonus removal clause.

[Fairman]

If you actually run the numbers on most of these, the lots needed to unlock the bonus cost more in spreads than the bonus itself. That's sort of the point of the offer.