CFDs more risky than betting on horses

The Australian today

"Push to 'gamble' on stocks"

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http://www.theaustralian.news.com.au/story/0,25197,23183756-601,00.html

Brokers must be starting to feel the pinch as they can see all that commission going to some one else.

CFDs involve borrowing money to bet on share price and foreign exchange movements. But it is far worse than gambling because investors who do not take "stop loss" measures to limit losses can shed much more than the money that they bet.

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No mention of trading shares directly using margin apparently this is not gambling but using CFD's is?

I know a few people who have lost their shirts by trading CFDs," he said. "They didn't know what they were doing and they lost a lot of money."

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I know plenty that have done this trading with no leverage, the old joke comes to mind "How can you end up with one million dollars trading, start with two million" I have found people using leverage tend to use stops more so of course there are always those that don't....

I would have thought if there was a major issue that this recent market fall would have fried plenty of accounts by now and it would front page news.

I started trading CFDs in 2002 with CMC (the old Deal For Free, not so free I can tell you) the main issue being the Market Maker platforms messing with spreads and throwing up re-quotes.

Higher leverage exists in Forex and Futures!

I think its an Broking industry beat up

What do others think?

Focus

Re: CFD's more risky than betting on horses

Totally agree Focus, looks like one hell of a typical media beat up to me. Just have to look at the fact that even company directors were getting margin calls when the market went belly up. Don't matter if it's CFDs or plain vanilla margin, over leverage and ignore stops and you're asking for trouble. And as was mentioned in another thread, even standard Commsec equity accounts give you $25K plus 2 times your portfolio as an initial balance, more than enough to get you into trouble if you're stupid! (sorry, I meant unlucky )


Cheers
AV

Re: CFD's more risky than betting on horses

The risk in my view is two fold.

(1) People who don't have enough capital or equity to trade period are using CFD's
(2) Those people have no idea about risk management and the correct use of leverage.
I have been one of those people---fortunately I wasn't trading CFD's but have traded Margin for many years.

There is also a hidden agenda in my view

The traditional Stock Broker is becoming a dinosaur.Many are being driven to laying off staff.Running a brokerage cant compete with online brokerage rates and overheads.Services offered are way behind the time.
It will take some re invention for brokerages to survive in my view.Id say the "Big" money in the USA spoke and saw the writing on the wall.
Personal view of course.

Re: CFD's more risky than betting on horses

As people are saying, there is probably an ulterior motive behind this article. Of course there must be the occasional person who blows up using CFDs. I don't know any personally. I know people who have made big little mistakes, you know the one where the stop was meant to get them out at a $500 loss and it became a grand. Nothing too drastic really though.

What I would bet is more common though, are those who play nightly, regularly topping up their accounts, not keeping proper records, and insisting that they're probably about breakeven, but in actual fact they're being bled by the CFD broker. I know one guy who shed 7k in a year doing this, just on round-trip brokerage. It was better than watching TV after work, and global market exposure meant that he could be an 'expert' anywhere a market was open, any time he was feeling clever.

ASX.G

Re: CFD's more risky than betting on horses

It is indeed a very slanted article. They certainly haven't bothered to stick to facts. For example they say "You take a punt, with borrowed money, on whether a share price or market index will go up or down." In fact, if you shortsell using a CFD you do not borrow any money. You in effect borrow shares which are then sold and you effectively hold the proceeds on which you receive interest until such time as you close out the trade.

If, as IFocus suggests, the article is a broking industry beatup then people should consider this. The article does not mention the enormous risks of trading conventionally through an online broker whose trading platforms fall over every time there is high market volatility, precisely when a trader most needs access to the markets. If CFDs should be banned to protect the unwary then certain online brokers should also be banned.

Re: CFD's more risky than betting on horses

blablabla said:

If, as IFocus suggests, the article is a broking industry beatup then people should consider this. The article does not mention the enormous risks of trading conventionally through an online broker whose trading platforms fall over every time there is high market volatility, precisely when a trader most needs access to the markets. If CFDs should be banned to protect the unwary then certain online brokers should also be banned.

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Excellent point

Re: CFD's more risky than betting on horses

blablabla said:

It is indeed a very slanted article. They certainly haven't bothered to stick to facts. For example they say "You take a punt, with borrowed money, on whether a share price or market index will go up or down." In fact, if you shortsell using a CFD you do not borrow any money. You in effect borrow shares which are then sold and you effectively hold the proceeds on which you receive interest until such time as you close out the trade.

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Literally speaking true, but it is exactly the same as borrowing money, ie. you can shortsell 10 times the amount of shares with regards the amount in your account.

If things go pear shaped you will be forced to buy back those "borrowed shares" which could cost you many times your account size.

I haven't read the article but the title is correct, with horses you know the amount you will lose, unless using guaranteed stops you have no idea of the damage that can happen to your account.

I agree with some of the posts above, only traders or investors with a sound knowledge of risk / money management should use CFD's.Having said that there is usually an ulterior motive with these types of headlines.

Re: CFD's more risky than betting on horses

I still think the main gist is to gouge market share . It's just convenient that the ASX has now got their model rolling ...............

What will be interesting is how it compares .

Re: CFD's more risky than betting on horses

I'll believe the concern the Brokers are showing for the punter when they allow you to attach 5% GSL's to margin loans... or would that be cutting off their nose to spite their wallet?? After all, the recent mayhem was caused in the main by margin loans.. mainly but not limited to Tricom.. I thunk..
Cheers
..........Kauri

Re: CFD's more risky than betting on horses

Oh that's good .............

Re: CFD's more risky than betting on horses

Porper said:

Literally speaking true, but it is exactly the same as borrowing money, ie. you can shortsell 10 times the amount of shares with regards the amount in your account.

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I fully agree that the leverage is the same for shorting CFDs as for going long. Also I agree that it is up to traders to manage their own risks and if they don't fully understand what they doing then they really shouldn't trade CFDs or any other product.

But I don't agree that borrowing shares is the same as borrowing money. Both actions do involve borrowing, and with CFDs both actions do involve high leverage. One difference is that the probability of suffering a massive loss is lower for shorting because stocks tend to rise stratospherically less often than they dive catastrophically.

CFDs are very useful for serious traders. Online brokers do not allow most of their clients to short-sell at all, nomatter whether or not leverage is involved, so CFDs provide a very useful tool for a wide range of stocks that is not available to most retail traders through any other channel.

I bet that comments in the newspaper article like "I know a few people who have lost their shirts by trading CFDs" do not apply to people who shorted using CFDs in the recent downturn. Maybe somebody went long with no stoplosses. People often blame others for their own mistakes.

Re: CFD's more risky than betting on horses

Why not just use option spreads? Reverse Ratio Spreads ('backspread' -big move in the market) or Bear Call/Bull Put Spreads? No loans no BS.

Re: CFD's more risky than betting on horses

Tinpusher said:

Why not just use option spreads? Reverse Ratio Spreads ('backspread' -big move in the market) or Bear Call/Bull Put Spreads? No loans no BS.

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Depends on the style of trading Tinny.

Vertical spreads have a much higher contest risk (spread, commish etc), delta for delta, than CFDs.

A quick swing/day trade will not suit vertical spreads.

Re: CFD's more risky than betting on horses

True WayneL. I was not thinking day trade.

More 'position' trade (ie 30 or 60 days to expire).

As a 3D Aluminium Tube sorter in Canada I often had mid week AMs off depending on the shift roster. The Emini SP500 on the CME was one of the most liquid markets I've ever seen for instant fills, the day trading dream - instant fills and big leverage and all the big trends over within 90 mins of market opening.

I recommend anyone willing to burn the midnight oil to have a go at the CME Emini SP500!

Re: CFD's more risky than betting on horses

Tinpusher said:

True WayneL. I was not thinking day trade.

More 'position' trade (ie 30 or 60 days to expire).

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Perfect then. With the added advantage of metamorphosing the position as your view evolves.

Have you read any of Charles Cottle's work?

Re: CFD's more risky than betting on horses

Options, Perceptions and Deception caught my eye but have not read it. A recommended read perhaps? Anther book purchase coming up!

I've traded options on futures in the US, and direct day trading the SP. Since I've returned home, I'm a 'virgin' trader on Aussie derivatives markets hence my queries on the other thread.

I'm employed sorting aluminium here but would dearly love to become a full time trader!

My main concern is liquidity and resultant slippage - If I can get fast fills I'm willing to give it a go!

Thanks for the insight WayneL.

Re: CFD's more risky than betting on horses

Two comments:

1. This statement is BS and totally unfounded from personal experience -

"The traditional Stock Broker is becoming a dinosaur.Many are being driven to laying off staff.Running a brokerage cant compete with online brokerage rates and overheads.Services offered are way behind the time"

Please name two firms laying off staff at the moment... and I will name five desperately seeking new brokers.

The vast majority of wealthy people prefer to pay for advice and execution - rather than pretend they know what they are doing or feel they wish to spend the time required to do it properly.

Many simply feel they benefit from deal and newsflow - something a Commsec player does not get.

The clients getting the most benefit from a traditional broker are those with the most money to play - but you may be fascinated by the number of people not happy to invest their lifesavings in the market through a discount broker to save 0.8%.

From personal experience - a great number of people benefit from paying for advice and are happy to pay very large sums. Most very wealthy and smart investors investors in the stock market pay enormous fees in comparison to those available at execution only bucket shops because information is money.

These folk didnt get rich from being stupid and don't keep playing because they think they are being ripped off.



2. I agree that CFDs are worse than horseracing.

Reason:

People that have no idea about horse racing have $10 EW on something in a big carnival race. The imbecile's downside at the track is very small. Have you ever gone to the TAB and watched a mate with no idea bet $50k?

But, people with no idea of the markets / trading / volatility / gaps / leverage / fundamentals / dividends / newsflow / etc effectively bets $1000s on something so short term and so leveraged that it is a pure gamble

The imbecile's downside in CFDs is massive.

I remember in the midst of the bull market talking to a 'broker' with a CFD firm and he noted the hard part being having to find a new client base every 18 months.


The majority of comments here are based on personal experience and most would appear to have no idea of how the majority of people feel about or are equipped to, managing their investments.

Re: CFD's more risky than betting on horses

Tinpusher said:

Options, Perceptions and Deception caught my eye but have not read it. A recommended read perhaps? Anther book purchase coming up!

I've traded options on futures in the US, and direct day trading the SP. Since I've returned home, I'm a 'virgin' trader on Aussie derivatives markets hence my queries on the other thread.

I'm employed sorting aluminium here but would dearly love to become a full time trader!

My main concern is liquidity and resultant slippage - If I can get fast fills I'm willing to give it a go!

Thanks for the insight WayneL.

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Perceptions and deceptions is aimed mainly at market makers and will cause your brains to squirt through your earholes.

Options, The Hidden Reality is more retail trader oriented... it is still capable of causing brain damage and the occasional kidney stone, but very good IMO, so long as you already have good basic knowledge.

Re: CFD's more risky than betting on horses

Thanks mate!! Much appreciated.

Re: CFD's more risky than betting on horses

Well i think anyone with an addictive personality or habitually inclined would be unsuitable to instant credit rushes that CFD provides.If you start getting the desire to have `hits` constantly (usually if winning or to win back losses) then they got ya.Used sparingly they could be of benefit but like everything,

Moderation is a fatal thing. Nothing succeeds like excess.
Oscar Wilde

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p.s. Not a user, just looking and soaking up the feedback at present.