CFDs, anyone?

King_Weasel

Can anyone advise on CFDs (Contracts for Difference), preferably a qualified £ advisor? They are an alternative to share ownership and have the advantages (1) (for the present, at least!) of avoiding stamp duty and (2) enable profiting from falls in share price (called buying short) which is of course impossible with conventional share trading.

I appreciate they are categorised as high risk, partly at least because of gearing so you can lose far more than you actually invest. But you can still limit your total loss (by specifiying a stop loss level) and I suppose you don't have to use gearing if you don't want to. Certainly I would never be seduced by the low amount you might pay "up front" (any more than I regard cash in the bank as mine that is only there to pay credit cards when the 0% offer expires).

I currently buy and sell shares in the conventional way as a small investor and although I make mistakes or, conversely, sometimes hit lucky I hope I have a basic understanding of the risks involved. Do CFDs entail intrinsic extra risk once you (1) understand gearing and (2) put stop losses in place?

Informed advice much appreciated.

Malthusian

No-one on this board can provide advice.

Stop losses are in no way a guarantee that you will limit your losses to a certain level, especially in illiquid markets. If you have a stop loss that says you will sell your CFDs if they lose 20%, but the market goes from 19% down to 40% down without anyone wanting to buy your CFD at -20% in between (because the market is closed overnight, or because liquidity has seized up) then you will lose 40% regardless of what your stop loss said.

You appear to be already aware that they are ultra-high-risk so I'm not sure what other information you are looking for.

King_Weasel

Thanks, Malthusian. You said no-one here can give advice, then gave me some! I was unaware that stop-loss didn't necessarily mean what it said, so thanks for that. I admit I don't understand how a CFD would need another buyer as you suggest. I certainly won't go any further until I do understand this.

jimjames

King_Weasel wrote: »

Thanks, Malthusian. You said no-one here can give advice, then gave me some!

It's worth understanding what advice is. Details on products and pitfalls isn't advice. Definitely good to be aware of the risks, I'd also not realised the info about stop losses.

Malthusian

King_Weasel wrote: »

You said no-one here can give advice, then gave me some!

That wasn't advice, that was information. Advice would be "Don't buy CFDs".

*edit* For completeness, the reason no-one can give that kind of advice is because 1) advising on contracts for difference is a regulated activity 2) it is therefore illegal to advise someone to buy CFDs - or not to buy CFDs - if you are not authorised to do so by the Financial Conduct Authority 3) if you were authorised by the Financial Conduct Authority to give advice on whether or not someone should buy CFDs you wouldn't do it via an Internet forum.

King_Weasel

Thanks, Mathusian. Your points are well made. Maybe I shouldn't have used the word "advice". I was merely canvassing views and, advice or not, have learnt from what has been posted, as others have doubtless done by seeking "advice" on other topics here.

slowpoke_rodriguez

Read "THe Naked Trader" by Robbie Burns. He explains CFDs briefly but doubtless suggests further reading.

EdGasket

WIth CFD's there are ongoing charges so if the position moves against you, it will cost to hold the position open for a long time or rollover the CFD for another one when it expires. This is unlike shares which once bought don't cost anything to hold. CFD's are similar to spread-bets and best avoided <-- whoops was that illegal

masonic

slowpoke_rodriguez wrote: »

Read "THe Naked Trader" by Robbie Burns. He explains CFDs briefly but doubtless suggests further reading.

He went into quite a bit of detail on the closely related topic of spread betting in this old Motley Fool podcast.

brendon

Look at what happened to the Swiss Franc at the start of 2015. Did stop losses protect those trading in CFDs then? In one case, a supply teacher suddenly found himself owing £280,000.