Is CFD trading a good idea?

Question

I am planning on speculating in forex and possibly indices, however due to my lack of experience I don't want to invest too much.

With £100, you can't really get very far with indices, and profit in forex would be nearly unnoticeable. For this reason I was considering CFDs which are leveraged, hence allowing me to get greater gains (and, possibly, losses) for a smaller investment.

Now the question: is advisable for a beginner to speculate in CFDs? If not, is there a better way to invest with a small amount of money?

Answer 1

No, it's not a good idea. You started by saying you'd like to invest, but then mentioned something that's not an investment, it's a speculation. Both Forex and CFDs are not really investments. They are a zero sum game where over time, it's a pool of your money, the other trader's money, and the broker, redistributed over time.

If you truly wish to invest, you'll read up on the process, understand your own long term goals, and put aside X% (say 5-15) of your monthly income. You should look into investments that are long term, and will fund your retirement 30-40 years hence.

Answer 2

Now the question: is advisable for a beginner to speculate in CfDs?

No.

If not, is there a better way to invest with a small amount of money?

In the US, and I'm sure this carries to the UK, most (if not all) big brokerages (Schwab, TD Ameritrade, Fidelity, Vanguard, etc) have a set of funds that are zero load and zero commission though the fund will still have an expense ratio. This is the Barclay's UK page related to zero cost investing in the Barclay's funds. Barclay's might not be the right fit for a beginner as it seems there is a hefty account minimum, but the same zero commission concept exists in the UK. Again, most of these brokerages will also have an extremely low expense ratio S&P index (or some other market index) fund. As a beginner that's where you should start.

This is not meant to patronize beginners, it's just math. Assume your trade commission is £7. If your investment is £100, you'll lose £7 right up front to the buy commission, then another £7 when you sell. Lets say your position raises 10%, you'll be at a net loss of 4.7%.

 £100.00  |  Initial Investment
  -£7.00  |  Commission on buy
 _______
  £93.00  |  Maximum initial position

 £102.30  |  Position after 10% gain
  -£7.00  |  Commission on sell  
________
  £95.30  |  You just lost $4.70 after gaining 10%

Meanwhile if you put your £100 in to a 0.1% expense fee mutual fund with no transaction commissions and no load fees, after a 10% gain you'd owe £0.11 due to the expense ratio at the of the year. You'd have £109.89.

Beginners get crushed by fees and commission. It is not advisable, by any stretch of the imagination, to attempt to day trade or actively manage a portfolio of any sort of security; and commodities and currency are the WORST place to start.

Answer 3

If you have little investing experience, you shouldn't involve yourself in leveraged investments or short-term speculation at all. You will probably just lose money.

If not, is there a better way to invest with a small amount of money?

If you have little investing experience, you should not attempt to make a lot of money on a small investment at all. You will probably just lose money.

The best way to invest with a small amount of money is to put it in a low-cost, mainstream investment product (like an index fund), and wait and save money until you have more. By that time, you may decide that leaving the money in a low-cost index fund is actually the best thing to do anyway. (Incidentally, I don't know if fund minimums are different in the UK, but in the US, an amount equivalent to £100 might not even be enough to start, so you might have to just put it in a savings account until you save enough to even buy into a mutual fund.)

Answer 4

An important point yet to be mentioned is that, with a standard investment, the most you can lose of your £100 stake is £100 (if the company literally goes bust, say).

With shorting on the other hand, your downside is not limited to your initial stake. You could "invest" £100, but end up owing £200, £500, or, well, the sky's the limit.

Shorting is dangerous even for experienced investors. For a beginner, it is about the worst possible investment strategy I can think of!

Answer 5

CFD's are highly speculative so they should represent a very small proportion of your asset allocation(4% or less). If you need the 100 for food or rent then definitely not.

However if you have some money spare that you could afford to lose(you will definitely need more than 100) and you are prepared to put the time and effort it to learn and manage your risks carefully then there is no reason why you shouldn't try it.

I would advise against trading on a demo account for learning. Most of what you need to learn is how to stick to your plan while under emotional pressure.

I also wouldn't call it gambling but managing risk. The best traders only win half of their trades so they might have a losing streak of 5, 10 or 20 trades. If they are trading 5% of their capital with each trade then poof they're out. Their winning trades might make 10-100 times the amount risked so they know that it is more profitable to always only risk around 1%. Sticking to that requires discipline.

This page has a pretty comprehensive introduction: http://cfdtradingo.com/what-is-cfd-trading/

Answer 6

Since you mentioned £, there's a good chance you're in the UK. The UK is something of an anomaly in the world in so much as you don't need to use CDFs because you can 'spread bet'. The principle is ultimately the same: you're making a bet that the price will change in your favour.

As others have said, this isn't investment and isn't a good idea if you don't know what you're doing. It's a possibly risky way into the field because your losses can exceed your deposit. It's generally pretty short-term, and so is highly susceptible to unpredictable temporary market fluctuation ('real' investing is usually longer term, and so based on the general trend of the market, which is generally less difficult to predict).

That said, half-way decent spread betting companies will check you out pretty thoroughly before you start, they'll offer a 'demo' account where you can trade with 'fake money' (ie. you make no deposit, and can make no withdrawals) until you're comfortable. Some do training courses and seminars too. When you first start trading for real, you'll need to put a 'stop loss' on every trade, and thus mostly avoid the problem of losing more than you staked (it's still possible to lose more than you staked with a stop loss, but in most cases your excess loss won't be ruinous, just eye-watering).

I worked for one such spread-betting company (a good, honest one at that). We once had an internal competition using demo accounts - the aim was to make as much money as you could in a two week period. I think we started with £10,000 each. A couple of people 'made' a decent looking amount of money in that time, but dozens more of us lost at least all of the money. It is possible to make money, but there's a far, far greater chance you'll lose all you're prepared to stake (and maybe more). Also, using a demo account is very different from using real money (no matter how much you tell yourself it isn't).

Answer 7

Yes under certain circumstances! Educate yourself first. Consider algorithmic trading when you code your strategies and implement your ideas - a bit easier for psychology. And let the computer to trade for you. Start with demo account without taking personal risk. Only after a year of experience try small amount of cash like you said 100$. Avoid trade when big news events are released. Stick to strategy, use money management, stop loss, write results in the journal... learn & improve... be careful it is very hard journey.

Answer 8

I wouldn't use it to take leverage unless you don't mind loosing your entire investment (this is a possibility as shares are already quite volatile). However, you don't have to take leverage and still trade CFDs. Benefits of doing so:

• Typically significantly lower commissions (especially important if you're intending to invest a small amount)
• Inherent FX hedge for foreign securities (because you have a built in funding which means a liability in the same currency as the asset)
• It can offer advantageous tax treatment (depending on whether you can convince the taxman that you were gambling rather than investing)
• You can invest some of the leftover cash in safe government bonds and earn some yield while your investment is doing its job (but keep some extra cushion as you don't want the broker to liquidate your position if your loss exceeds the margin)
• You can get CFDs on indices

Disadvantages:

• Cost of funding (this could be around 1% per year -- still less than you save on trading commission unless your trades are large -- doesn't sound like it based on the question)

Answer 9

Starting with small amount of money is definitely a good idea, as it is a fact that majority of the online traders lose their initial investment. No wonder that for example in the UK, FCA decided to make steps to raise the chances of clients staying in business by limiting leverage to 1:50 and 1:25. http://www.financemagnates.com/forex/bloggers/new-fca-regulations-going-affect-retail-brokers/

Trading leveraged products is risky and you will lose some, or all your money with very high chance. But that doesn't mean necessarily it is a "bad investment" to trade on your own.

Imagine you have a $1000 account, and you trade max 0,1 lot fx position at once maximum (=$10.000 position size, that is 1:10 leverage max).

• You can have thousands of trades even if your strategy is not profitable
• You can experience real market events
• You can develop your own strategy
• You can analyse your trade history and mistakes you made
• After a few years you will have a track record that matters!

Beginner steps are very challenging and exiting, but turning back to your initial question:

is there a better way to invest with a small amount of money

Obviously you could purchase a cheap ETF that follows a broad market index or an already existing successful portfolio.

Answer 10

I think it would be very small the number of people who started spread betting and made a profit in their first 6 months and that means that most people as the sign says make a a loss. I'm not saying you can't make a profit from it but you need to obtain some knowledge and develop a strategy this is very important without a good strategy it is nearly impossible to make a profit. It should not be money you can't afford to lose 100 ok maybe not relevant here but then you have emotion which can also make you lose money even though you have everything else right. But if it's something you're interested in learning about try a demo account first see how you get on but remember there will be no emotional attachment until it's your own money then it gets interesting

Answer 11

Is used cmc markets application (via my bank at the time) to gain leveraged exposure to the financial markets, with no tax payable as its classed as gambling. I am sure there are other websites/application offering the same.

The results weren't particularly pretty for me, but the concept is sound imo.