Trading Contracts for Difference

You’ll often see advertisements for courses teaching you how to make a bucket load of money through trading. Trading in Contracts for Difference (CFDs) are one such investment product that have been regularly advertised in recent years.

These publicly-targeted course always concern me and they also concern the regulator, ASIC. ASIC are so concerned they’ve published a very useful guide to trading CFDs.

I am concerned because I see that our human nature ticks us into focusing on the glamorous headlines of potential returns whilst blinding us to the complexity of the strategies and products. They require a great deal of expertise to make the potential high returns, plus they come with higher risk. Many people don’t fully grasp that.

In publishing the guide ASIC Commissioner, Greg Medcraft, said: “Our research with CFD traders found that many traders don’t know or don’t appreciate key aspects of how CFDs work, despite the fact that they are actively trading them. This guide aims to fill some of these knowledge gaps, especially around the trading risks.”

Key Rule: “First do what you understand”

I agree wholeheartedly with the guideline provided by ASIC that retail investors should consider trading CFDs only if they:

  • have extensive trading experience;
  • are used to trading in volatile market conditions; and
  • can afford to lose all of – or more than – the money they put in.

View the guide on ASIC’s webiste or download a copy of Thinking of trading contracts for difference (CFDs)? here now.

Investing between the flags

ASIC, the Australian regulator of most financial services, has published this introductory book called “Investing Between the Flags: A Practical Guide to Investing“.

If you are absolutely brand new to planning your money and investing then this book may be useful in enlightening you of concepts that are essential to understand. In a sense it is about increasing your base financial literacy. Things you may discover include:

  • Mainstream types of investments (asset classes)
  • Main risks of investing
  • Risk based investment portfolios
  • Avoiding financial scams

The book does include some useful check lists such as the one about getting ready to invest.

Historical returns

One of the interesting graphs presents the historical annual returns of the Australian share market from 1900 to 2008. (Page 29). You can see that it is similar in shape to the bell curve with most annual returns being between zero and 20%.

Expected returns

One of the fascinating areas for me as a financial planner was the information on risk profile based investment portfolios (pages 26 & 27). In particular ASIC have published the expected annual average return from each portfolio based on historical returns.

It fascinated me as a planner since the expected returns are higher than we as licensed professional advisers could get away with using when advising clients. Maybe I’ll start including those two pages in my statements of advice as proof of my “reasonable basis of advice” if ASIC’s lawyers ever come knocking. 🙂

What you won’t get

One of the limitations of publication from a Government regulator is that that can’t really express their opinion nor give you detailed processes for how to make a decision that is appropriate for you. They just tell you to make your own decisions and here’s a few basic things to keep in mind.

That’s where sites like mine (The Money Guide) come in. You’ll find articles where I take a stand and share my opinion. Plus in the detailed resources I share the processes I use when selecting the appropriate strategies for clients. So if you are not yet a subscriber now is a great time to get on board as I have lots more detailed resources planned for publication this year.