CFDs

In by Shaun LenaghanLeave a Comment

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Shaun Lenaghan

Hi guys, I really love the podcast and think you are doing great work.
Apologies in advance for a long winded question, however I think it’s really interesting and perhaps worth talking about.

My question is about leveraged CFDs. I have heard your criticism among the chorus of many others. Most notably ASICs proposed restriction on CFDS after a 2017 review found that 72% of retail clients who trade CFDs lose money (link below).
When I recently opened an IG account, I was very honest when setting up my profile, I have little to no financial experience, etc.
The IG platform restricted me to ONLY trading leveraged CFDS **with a guaranteed stop level.

One thing I am quite experienced and good at is risk management. I feel like I have a reasonable handle on how CFDs work and could definitely understand how people could get caught out with them, however I can also see a way to utilise them with an appropriate level of risk.
For example: If I have a long term approach to the market and wanted to purchase a CFD, going long on the price of a relatively conservative stock, perhaps an index ETF and I place a guaranteed stop at say 40% below the value.
As long as I have the capital to cover the 40% drop in notional value and accept that a crash will also trigger a 1% stop loss premium of the notional value, the risk/reward becomes somewhat acceptable?

An example below:
-AAA shares priced at $100 per share.
-I open a CFD going long for 1 share with a $10 deposit.
-I place a guaranteed stop loss if the share goes to $60.

– Either the shares goes up and I sell the contract when I need for a leveraged profit. example sell at $140 and take $40 profit.
– Or the share goes down and I am stopped out at $60, forfeiting my $10 deposit + $40 drop in notional value and 1% premium $1. (I would calculate this risk before opening the contract).

My question is:
Are guaranteed stop losses really guaranteed in the event of a market crash?
Is there any other problems with my rationale?
Or are IG evil and want to put inexperienced retail investors into a product which will lose them a lot of money?

thanks,
Shaun

https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-220mr-asic-proposes-ban-on-the-sale-of-binary-options-to-retail-clients-and-restrictions-on-the-sale-of-cfds/