Please explain how I can make money from CFDs

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MangoJoe

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RTE News said:
Ms Lowry had put up €80,000 for an investment known as a CFD which made a profit of €80,000 over 18 months and was split evenly between them.
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This intrigues me, 80k profit over an 18 month period? - None of you so-called experts have ever found the time to advise me on this basis!!!

- Shame on you.

Seriously though, would someone care to explain in a nutshell the state of play with these investments and how likely one might be to make any appreciable amount of money against the inherent risks etc.

Thanks
 
It's the same as trying to pick shares. Most people do not have any chance of outperforming the market on a consistent basis.

I have done a spread bet which is very similar to a CFD on the value of Bitcoin. But that was a rare opportunity to be able to sell something which was worthless for $15,000. But I have had it for over a year now and while it's in profit, I thought it would have been much quicker.

Brendan
 
MangoJoe said:
This intrigues me, 80k profit over an 18 month period? - None of you so-called experts have ever found the time to advise me on this basis!!!
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It was a gamble that paid off. Gamblers do sometimes win.

Sometimes they don't.

You asked about inherient risk. Answer: Sean Quinn

One odd thing about this current 'win' is that if half of the win went to Quirke, ie 40K, what about CGT. Revenue might be asking the same question. Particulary as there was mention of another 50K that doesn't exist due to no paper trail.
 
Thanks for the replies folks.

I'm clearly innocent regarding all of this.

Typically are people up and down the Country investing large amounts of money in CFDs and walking away with 100% profit (minus CGT? [Is this often dodged?])

Who's advising them? Are they meeting with investment advisors typically?

To be entirely frank I suppose I was shocked that the people in question were turning 80k profit in 18 months - I know this may make me sound judgemental of them.... But I'll never be lonely in that ;)
 
Some people are placing bets on horses and walking away with winnings.

But most lose it again fairly quickly.

That is why most bookies are such profitable businesses.

Brendan
 
MangoJoe said:
Thanks for the replies folks.

I'm clearly innocent regarding all of this.

Typically are people up and down the Country investing large amounts of money in CFDs and walking away with 100% profit (minus CGT? [Is this often dodged?])

Who's advising them? Are they meeting with investment advisors typically?

To be entirely frank I suppose I was shocked that the people in question were turning 80k profit in 18 months - I know this may make me sound judgemental of them.... But I'll never be lonely in that ;)
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It's not quite the same as making 100% on an regular equity investment. It is highly leveraged. CFD's ("Contract for Difference") essentially are the same as spread betting or somewhat similar to options - if the investment goes in the right direction you make a high rate of return as calculated against the initial capital. But think of the initial capital as being like a deposit on the investment as opposed to the total capital at risk. Maybe if we take a simple example....

If an equity is trading at €100. You could pay €100 and buy one share. If the price goes up to €110 you make 10%. If it goes down the same you lose 10% - straightforward.

If you buy the CFD of the equity at a value of €100, the contract is essentially that you will receive any increase from €100 but you will pay out any decrease. Usually the broker will require a deposit ("initial margin") to cover any initial movements (let's say €10). So if the price of the equity goes to €110 and you close out the trade, you receive €10. You could look at it as €10 gain on a €10 investment (100% return) but that would be a dangerous way to look at CFD trading. You still had a capital risk of €100 - you would be liable for €100 if the stock went to zero. But you have the benefit of not trying up capital in the meantime - hence the leverage element.

If the stock went down to €90, your broker would take your initial margin of €10 (do you call that a 100% loss on a 10% move?) and if you wanted to keep the trade open you would have to stump up more margin to do so. If the stock continues down and you still want to keep the trade open you have to constantly top up the meter. In reality this variation margin process is usually done daily - you always have to have enough margin in the account to cover the risk of a significant movement in the price.

The danger with trading CFD's (or spread bets) on the assumption they produce abnormally high returns without understanding the total capital at risk is that it only works if every trade goes in your favour pretty much immediately. If all your trades go against you quickly, there can be huge capital exposure suddenly and a need to liquidate to cover - which in effect is what happened the global banking industry in 2008
 
In answer to OP's question, it's worth repeating the warning on IG Index's website:
"CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider."
So there you are: an 81% chance that you'll lose money. The chances are probably higher if you're a beginner.

Bronte said:
what about CGT. Revenue might be asking the same question.
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A spread bet is exactly that - a bet - and so is exempt from CGT. Of course that also means that the 81% who lose money can't claim the loss against gains elsewhere, so all in all it's probably good for the taxpayer that spread bets are not subject to CGT!
 
Colm Fagan said:
A spread bet is exactly that - a bet - and so is exempt from CGT. Of course that also means that the 81% who lose money can't claim the loss against gains elsewhere, so all in all it's probably good for the taxpayer that spread bets are not subject to CGT!
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CFDs and spread bets are taxed differently.

CFDs are subject to CGT, unless it's part of a trade in which case it's income tax.
 
@RedOnion I agree. I recall, a few years ago, trying to understand the differences between spread bets and CFD's. I concluded quickly that spread bets were the way to go. I probably thought I was going to make a fortune on them, which meant that exemption from CGT was a big advantage. I was young and innocent then ;)
 
You put up a percentage of the bet but are liable for the whole losses.

Can work if you want to keep money in cash. You have €100,000. Put up €10k. If it doesn't work, you still have the €90k to cover your losses.

But what people usually do is stick the full €100k on (10% of overall bet). If it doesn't come in, you owe €900k and you have to explain to your wife why you are selling the house and moving in with the in laws.

Investing is a long term game. Don't be fooled by get quick rich methods, they are very dependent on luck.


Steven
www.bluewaterfp.ie
 
@SBarrett . Steven, it might be worth expanding what you've written, as the wording could confuse some readers. What I think you're saying is that, if you deposit €100,000 in a spread bet account, the spread bet company will allow you to "buy" shares worth €1,000,000, but if they fall 10%, you're wiped out. (In practice, the spread bet company would close your account when the balance, after deducting mark to market losses, fell below the margin requirement, which is normally 5% for large cap companies, so you wouldn't be allowed to lose the full €100,000). If, on the other hand, you deposit €100,000 and "buy" shares with a market value of €100,000, which then fall 10%, your account is worth €90,000 (less interest costs - see next paragraph) and you've had no margin calls. Is that what you're trying to say?
It's worth noting that, in both cases, you're charged daily "interest" on the current value of the shares "purchased", i.e. on €1 million (on day 1) in the first example, on €100,000 in the second example. Needless to say, there's no interest credited on the deposit.
 
From memory this is what I did:

I sold 1 Bitcoin for $15,000

So when Bitcoin fell $2,000, I was up $2,000

If it had risen to €19,000, I would have been down $4,000.

I set a limit of $25,000. In other words, if Bitcoin had risen to $25,000 I would have been closed out automatically.

I was required to put up $10,000 to cover the potential losses.


A purchase works on the same principle.

Say, you buy one Bitcoin today at $5,000.

You will have to set a limit on the fall - say a fall of $2,000.

Then you will have to put up a margin of $2,000.

If Bitcoin falls $2,000, you will lose your investment.

If it rises to $6,000, you will be up $1,000.

If you want to take more risk with your $2,000, you could buy 4 Bitcoin at $5,000 but the limit on the fall would be only $500. Once it falls $500, you would lose your entire stake.

But if it rises by $1,000, you will be up $4,000.

So when I sold Bitcoin, I put up enough margin for it to rise to $25,000 to reduce my risk.

It's a very exciting trade. But if you have any gambling tendency at all, stay well away from it.

Brendan
 
Brendan Burgess said:
It's a very exciting trade. But if you have any gambling tendency at all, stay well away from it.
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Brendan, you're absolutely right, but it can be great fun, if you know your limits. I've had a wild ride with Tesla, in which I've opened and closed short positions a number of times over the last year or so.
Gordon Gekko said:
90% of investors lose 90% of their money within 90 days according to the CFD/spreadbetting industry itself.
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Gordon, it's a catchy quote, but not quite accurate. As I wrote in an earlier post, IG Index states on its website that 81% of its clients lose money. The losing percentage for clients of CMC Markets is slightly lower at 80%. I reckon the ratio is much the same for others. Either way, the message is clear.

Another way of looking at it though is to ask what percentage of Paddy Power's customers lose money on the gg's?
 
Colm Fagan said:
Another way of looking at it though is to ask what percentage of Paddy Power's customers lose money on the gg's?
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Most people don't understand the critical difference between trading financial products and betting on horse racing. Many retail traders trade the wrong products and most of them repeat the same mistakes which is why 80% odd of retail trading accounts lose money. Avoid non exchange traded products like CFDs imo where the contract is with the broker.
 
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