We have cooperated with famous Forbes / Capital.gr on the clients' and market's education with an emphasis on warning against the risks of leveraged products and financial derivatives. We present examples from Greece.
Mobile trading: It Has Never Been So Easy to Lose Your Entire Investment
Online trading platform users have the professional stock traders’ tools at the hand’s reach and often underestimate risks.
The online world enabled access of stock trading to broad public and it is no longer a privilege of selected groups of people. Nowadays we don’t have to go to a bank or search for a broker, in theory we don’t even have to consult what and how to trade and invest into. We don’t even have to own a powerful computer with lots of screens as we see in movies related to Wall Street investment bankers. We can be trading literally anywhere and anytime. It seems so easy and, moreover, with certain financial instruments we are allured also by the vision of high profits, which do not correspond with the amount invested. This is because of leveraged trading in an investment instrument called “contract for difference”, also known as CFD. With a simple mobile trading platform in our hand, it is very probable that we will not realize how extremely risky the CFDs are.
Leverage trading with CFDs
How does the financial leverage with CFDs actually work?
As opposed to stocks or currencies, contracts for difference have been used in trading and investing only recently – since 1990s. At the beginning they served financial institutions to hedge against exchange rate movements of stocks and other assets. It was only later when they became a product traded by smaller investors and traders. When using CFD instruments, the trader does not become an owner of a physical stock (or any other underlying asset), which means he also does not have any rights to profit or voting rights.
CFD are financial derivatives that are used for price movement speculations. In simple words, CFD is created by opening a position and is finished by closing a position. Traders may speculate on price decrease or growth. When closing a position, trader’s speculation is compared to the real price movement, which means a calculation of a profit or loss.
Multiplied profit or loss
The trade’s outcome can be multiplied by financial leverage, which enables traders to add usually significantly higher amount of external capital to their own capital. Leverage of 1:2, for example, means that a profit – in case that the trader expected correctly the price movement of the underlying asset – shall be doubled. In case of 1:5 leverage the profit shall be 5 times higher. The prospect might seem to be attractive until we realize that the same logic works for the loss too. Using financial leverage thus means that traders can lose their entire investment even with a relatively small change in the price of the underlying asset. For traders with a positive attitude towards risk, this type of trading may be a possible part of the portfolio, although even experienced traders usually do not use higher leverage than 1:5. We however discourage any unexperienced trader or an investor with any level of risk aversion from investing their capital in CFDs or other leveraged financial instruments. The cautiousness is even more important nowadays when markets are extremely volatile. In spite of the warning, if an investor wants to become a trader with these high risk instruments we strongly recommend to study how the capital market and modern financial instruments work prior opening any position in the market. Also, it is indispensable that an unexperienced trader starts with a demo first.
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