When someone tries to sell you something that’s only good for them, dressing it up as something else is the oldest trick in the book.
An example is when CFD brokers tell you their product is stock trading. Not true.
Stocks, also known as shares or equities, are the unit of ownership in individual companies. Public companies have their shares listed on stock exchanges, where they can be bought and sold.
For example, Apple has 5.2 billion shares listed on the Nasdaq exchange. Apple (AAPL) is currently trading at c. $167 per share, which gives the company a market capitalisation of c. $861 billion.
Groupings of various stocks are called stock indexes. The S&P 500 index, for example, is tracking the performance of 500 large companies listed on stock exchanges in the United States.
A contract-for-difference (CFD) is a contract between a client and their broker. It lets the client bet on the price movement of an asset (e.g. a stock, but could be almost any financial asset), without actually owning the asset.
It’s a bit like a game of roulette, where you can bet the price of a stock will go up (black) or down (red). What you lose, the house (CFD broker) gains.
Again, you don’t own the asset the contract is priced on, e.g. the stock.
Once you sign up with a CFD broker, many will be quick to offer you leverage: money that’s loaned to you, so you can make bigger bets.
A 1:10 leverage is only a tap away on your phone. A £1,000 punt can quickly turn into a £10,000 loss. Yes, you would owe £9,000 to your broker in that scenario.
That escalated fast, didn’t it?
The Financial Conduct Authority (FCA), the UK financial watchdog, found that 82% of the clients of CFD brokers lost money on these products. The average loss per client was £2,200 per year. 😢
If you understand the odds, e.g. you are a sophisticated trader and like to take a punt, fine.
But the above proposition is far from stock trading. Our community constantly sends us messages and photos of CFD brokers advertising their product as stock trading, and let’s just say they aren’t happy about it.
Buying a real stock is a different proposition. You own a piece of the company you are investing in. You can’t lose more than you put in.
As long as you are appropriately diversified (i.e. invest in many different companies, or in an index) then you are likely to do well over the long term. Over the past 100 years the S&P 500 index has returned c. 10% gains per year on average, for example.
Even if you bought at the peak of the last bull market in 2007, before the crash, you would have more than doubled your money by now.
But the average CFD customer would have lost over £20k in the same period.
If you spot a misleading ad from a CFD firm, send us a screenshot or photo, or just report it directly to the FCA.👮🏽
You will help create a better, fairer, more transparent environment for the average investor.
Important Information
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).
