How does trading CFDs differ from gambling?

[Mrmagoo]

I found the newbie thread funny because I am 28 and just starting to think about investing. Essentially I have been just another money waster, but I want to change all that.

What I am pondering at the moment relates to risk.

If houses ALWAYS go up in value then we could assume that a house is a sort of risk free return so we should be able to get more out of shares ?

I'm also wondering what the cost of holding an options position vs the cost of buying and selling a house would be ?

Also when we say risk do we automatically assume that means you're going to lose it all ? Is risk the term used for something which is essentially fancy gambling i.e it has a zero sum OR a zero sum to small time investors ?

Lets say I can set aside between $250-$500 a week to buy shares, how is this any more or less risky than buying a house for capital gains purposes, given that if it does not increase I get stuck with interest payments a low liquid asset and high buying and selling costs.

So while it might seem STUPID to buy between $250-$500 worth of shares on some sort of margin (not that amount each week but that is how much I can probably put aside).

Essentially I'm not afraid of risk. That money could be lost in other stupid ways, such as beer and strippers and that 06 BF falcon I've been eyeing. No one ever got ahead without taking a risk and my income position indicates that buying an IP is suicide unless we see high growth... and I don't really have the expertise to invest capital into an actual profit generating business. (but I do have a few schemes on the back burner).

Also does anyone know how/where I can get access to good stock market data and in how raw of a form I can get it ? I currently look over google finance.

I also would like to know where I can find the prices, interest rates ect on options and a good place to find out exactly what all of the definitions mean ?

What are the capital requirements to trade CFDS ? What are the eligibility requirements ?

So if I trade with $1000 on 10% margin, would that mean my maximum possible loss is $10,000 if the share price were to go from 100% to 0% ?

I'm not racing out to start trading tomorrow btw but I want to start doing something to make something happen besides working my ass off to try and get another $80 per week raise..

Thanks in advance,

 

[Tysonboss1]

1 ,If houses ALWAYS go up in value then we could assume that a house is a sort of risk free return so we should be able to get more out of shares ?

2, I'm also wondering what the cost of holding an options position vs the cost of buying and selling a house would be ?

3, Also when we say risk do we automatically assume that means you're going to lose it all ? Is risk the term used for something which is essentially fancy gambling i.e it has a zero sum OR a zero sum to small time investors ?

4, Lets say I can set aside between $250-$500 a week to buy shares, how is this any more or less risky than buying a house for capital gains purposes, given that if it does not increase I get stuck with interest payments a low liquid asset and high buying and selling costs.

5, So while it might seem STUPID to buy between $250-$500 worth of shares on some sort of margin (not that amount each week but that is how much I can probably put aside).

6, Essentially I'm not afraid of risk.



7, So if I trade with $1000 on 10% margin, would that mean my maximum possible loss is $10,000 if the share price were to go from 100% to 0% ?

8, I'm not racing out to start trading tomorrow btw but I want to start doing something to make something happen besides working my ass off to try and get another $80 per week raise..

Thanks in advance,

1, They don't always go up, Houses are traded in a free market where prices can go both up and down.

2, The two are completely different, and if you are a beginner I would not recommend diving head first into options, Focus on learning investing first.

3, Risk is a large topic in itself, there are many different types of risk, some asset classes are exposed to more than others, Some of the risks can be mitigated by the investors actions,

4, Property and shares both have their own risks and rewards, Obviously adding debt into any investment operation adds an extra layer of risk and also possible extra reward. In my veiw debt should always be minimised.

5, why not just save the money each week and invest with out margin, Margin should be avoided if you are a begineer.

6, Before deciding if your afraid of it you should try and understand it, and how affects investments and how it can be mitigated. You should try and avoid any permanent loss of capital at all costs, Investing is not gambling, so it should not feel like gambling, As warren buffet says,"If you can avoid any significant losses and just keep hitting singles and doubles, you will get alot of runs on the board before the game is up"

7, yes you would end up with a $9000 debt.

8, also learn the difference between trading and investing.

 

[Tysonboss1]

Warren Makes a few really important points in this video, and he mentions a book I suggest you read.

 

[Tysonboss1]

In relation to the title of the thread,

Ultimately there are many ways people use CFDS that is nothing more than gambling,

But whether Property, Shares, gold or any other asset class is gambling all comes down to the individual allocating the capital into it.

Two different people can both buy $10,000 of BHP on the same day at the same price and one can be gambling while the other is making a sound investment.

 

[tech/a]

Lets say I can set aside between $250-$500 a week to buy shares, how is this any more or less risky than buying a house for capital gains purposes, given that if it does not increase I get stuck with interest payments a low liquid asset and high buying and selling costs.

There is a better time to buy Housing and a better time to buy Shares.
Now isn't a better time for either of them.

 

[Mrmagoo]

1, They don't always go up, Houses are traded in a free market where prices can go both up and down.

2, The two are completely different, and if you are a beginner I would not recommend diving head first into options, Focus on learning investing first.

3, Risk is a large topic in itself, there are many different types of risk, some asset classes are exposed to more than others, Some of the risks can be mitigated by the investors actions,

4, Property and shares both have their own risks and rewards, Obviously adding debt into any investment operation adds an extra layer of risk and also possible extra reward. In my veiw debt should always be minimised.

5, why not just save the money each week and invest with out margin, Margin should be avoided if you are a begineer.

6, Before deciding if your afraid of it you should try and understand it, and how affects investments and how it can be mitigated. You should try and avoid any permanent loss of capital at all costs, Investing is not gambling, so it should not feel like gambling, As warren buffet says,"If you can avoid any significant losses and just keep hitting singles and doubles, you will get alot of runs on the board before the game is up"

7, yes you would end up with a $9000 debt.

8, also learn the difference between trading and investing.

Thanks so much for the response.

Well you never know unless you try and learning often involves failure..

My friend bought a house during the GFC for 350k, a year later it was worth over 450k. Considering he put down a deposit of zero dollars, his return was a mathematical argument. (He did have mortgage costs which is why I want to compare the cost of holding a leveraged options vs holding a house)

He has now gone on to buy a house worth 3/4 of a million dollars and expects to get a 10% return on it and sell for a total profit of around 200k for both properties after 3 or 4 years.

Yes I'm not going to trade on margin until I have gathered a wealth of understanding.

In that case I'd like to know some good places to start researching ...

I'd like to know how useful analytics can be ? Can anyone point me in the direction of some good sources ? Also some good sources for information on risk.

Websites ? Sources ? Products ? I don't need someone to repeat the efficient market hypothesis to me or tell me how supply and demand work...

I think I know many of the theoretical basics of economics and finance and I want to get onto the practical side of things. For example what exactly are the fees for CFDs and how I calculate the return once they're paid.

Yes, I can just google but I find that people who are familiar often know of better places to look which will save a lot of time.

 

[tech/a]

He has now gone on to buy a house worth 3/4 of a million dollars and expects to get a 10% return on it and sell for a total profit of around 200k for both properties after 3 or 4 years.

Yes he will learn Capital gains tax soon enough
So will you.

Good luck with your pursuit of financial independence .

 

[Mrmagoo]

Yes he will learn Capital gains tax soon enough
So will you.

Good luck with your pursuit of financial independence .

Primary residence, but he always viewed it as an investment.

200k from a base of nothing...

Meanwhile I work 10 hours in a day for the hope of going from 67 to 75k.. a whopping raise of around $80 per week.

But... I kinda think houses aren't going to go up anytime soon.

So I want to learn more about shares.

 

[tech/a]

Primary residence, but he always viewed it as an investment.

200k from a base of nothing...

Meanwhile I work 10 hours in a day for the hope of going from 67 to 75k.. a whopping raise of around $80 per week.

But... I kinda think houses aren't going to go up anytime soon.

So I want to learn more about shares.

Interesting
If it was principal place of residence
How did he get 100 % finance.
What was collateral?

 

[So_Cynical]

Primary residence, but he always viewed it as an investment.

200k from a base of nothing...

100K paper profit and 100K profit he's expecting. the last house my mum built she was expecting to make 100K ...that was 4 years ago and she has now lowered her expectations and would be pretty happy to break even.

 

[Tysonboss1]

Interesting
If it was principal place of residence
How did he get 100 % finance.
What was collateral?

First home owners grant I am guessing,

 

[Mrmagoo]

Interesting
If it was principal place of residence
How did he get 100 % finance.
What was collateral?

Up until fairly recently I don't think you strictly needed to have a deposit. Infact housing loans were often pushed pretty aggressively as are most debt products still.

 

[Tysonboss1]

I wouldn't worry about the various fees involved in Cfds, I get the feeling you are going to be eaten alive and lose alot more than the fees.

I don't really have any positive advice to help you on you way other than to say

It's better to learn form the mistakes of others than to rely I personal experience alone.

And it is better to run a sound conservative operation than to try and make all the money in the world.

If you are after some reading material may I suggest the "intelligent investor" by benjamin Graham, from it you will gain an understanding of what an investment operation really is.

 

[Mrmagoo]

100K paper profit and 100K profit he's expecting. the last house my mum built she was expecting to make 100K ...that was 4 years ago and she has now lowered her expectations and would be pretty happy to break even.

I think what happened was the RBA were stupid and cut rates too much. There was a small window where you could buy properties which would be neutrally geared from the onset at the then current rates. This caused prices to sky rocket to a level which was acceptable at thethen current rates, and once rates rose the price was culled, and couldnt' go down, and it couldn't go up, so thats why there are auction clearance rates at below 50%.

Point is he was in the right place at the right time.. and for the reasons above those gains are probably realisable but you need to be in it to win it.

500 a week, thats 25k a year, at 10% leverage thats 250k I could potentially lose, which is way too much. Compared to buying a house at 5% leverage, your loss is practically ZERO PERCENT EVER because you can hold the position indefinitely and in real terms it gets LESS EXPENSIVE the longer you hold it.

250k on a house is 19k on interest, which basically means you've already got a fall of around 7% ?

But with a proper strategy I doubt prices are going to fall 100%, why can't you replicate the home buyer strat with shares (which are more liquid)?

How much would it cost to hold onto some sort of position for 12 months ? I'm guessing an impossibily expensive amount.

 

[skc]

But with a proper strategy I doubt prices are going to fall 100%, why can't you replicate the home buyer strat with shares (which are more liquid)?

How much would it cost to hold onto some sort of position for 12 months ? I'm guessing an impossibily expensive amount.

You should be aware that a major difference between a home loan and margin loan on share investment (or CFDs) is that the margin loan has a marked-to-market margin clause.

The bank doesn't usually come to you and demand you payback your home loan if you house loses 20% in value. But all brokers / CFD providers will call you when your margin loan falls below the threshold.

That's why you can't buy and hold shares with a high leverage even though you might be able to service the loan.

 

[Mrmagoo]

You should be aware that a major difference between a home loan and margin loan on share investment (or CFDs) is that the margin loan has a marked-to-market margin clause.

The bank doesn't usually come to you and demand you payback your home loan if you house loses 20% in value. But all brokers / CFD providers will call you when your margin loan falls below the threshold.

That's why you can't buy and hold shares with a high leverage even though you might be able to service the loan.

Yes I'm aware of that but how does that differ from paying a mortgage + costs associated with owning an IP ?

 

[Mrmagoo]

I wouldn't worry about the various fees involved in Cfds, I get the feeling you are going to be eaten alive and lose alot more than the fees.

I don't really have any positive advice to help you on you way other than to say

It's better to learn form the mistakes of others than to rely I personal experience alone.

And it is better to run a sound conservative operation than to try and make all the money in the world.

If you are after some reading material may I suggest the "intelligent investor" by benjamin Graham, from it you will gain an understanding of what an investment operation really is.

Well I'm glad that you're honest and I appreciate honesty. I'm not stupid. I have a risk averse personality. BUT. So what if I lose some money ? How does that differ from wasting it or renting a flashy apartment or buying a new car ?

Or save it all up over the next few years and have a whopping 50k that I can put on a deposit for a house I'll spend the next 30 years of my life spending the majority of my income to pay off.

What makes share trading such a bad investment ?

 

[Tysonboss1]

1, I'm not stupid. I have a risk averse personality.

2, So what if I lose some money ?

3, How does that differ from wasting it or renting a flashy apartment or buying a new car ?

4, Or save it all up over the next few years and have a whopping 50k that I can put on a deposit for a house I'll spend the next 30 years of my life spending the majority of my income to pay off.

5, What makes share trading such a bad investment ?

1, I am not saying you are, Lots of really smart people lose alot of money in the stockmarket. and some of the biggest financel collapses have been caused by people of super intelligence that just failed to follow some really basic principles.

2, Well it teaches bad habits if you look at it as a gamble, The biggest risk is that your early gambles may pay off and it will give you false impressions that you actually know what you are doing and that you have it all figured out, at which point you will have wasted the opportunity to focus on sound principles and will put ever increasing sums including debt money into a highly speculative scheme which will blow up on you.

3, you get to enjoy those things atleast, Handing large sums of money to a counter party in a gambling operation is much less enjoyable.

4, Saving for a house and paying it off has many merits, One of which it is cheaper than renting over your life, and you can live better in retirement if you have home equity, but thats another topic entirely

5, Share trading and share investing are two completely separate things, You either run an operation where you buy and sell shares much like a retailer buys and sells goods ( trading ) or you take a much more indepth interest in the operations of the underlying businesses and become a business owner and think of your self as a non manageing partner in the underlying business ( investing )

 

[wayneL]

Yes I'm aware of that but how does that differ from paying a mortgage + costs associated with owning an IP ?

Like skc said, the margin call.

With a mortgage, as long as you're making paymnets, the bank is unlikely to require cash to restore positive equity.

With shares (and other instruments) being marked to market daily, you will be required to deposit funds to restore the maintenance margin amount that day, or close out the position.

The use of options around a base position can help, but proper education required. (Not some muppet charging $4k for a weekend seminar).

 

[robz7777]

Well I'm glad that you're honest and I appreciate honesty. I'm not stupid. I have a risk averse personality. BUT. So what if I lose some money ? How does that differ from wasting it or renting a flashy apartment or buying a new car ?

Or save it all up over the next few years and have a whopping 50k that I can put on a deposit for a house I'll spend the next 30 years of my life spending the majority of my income to pay off.

What makes share trading such a bad investment ?

Open a first home saver account. First $5500 deposited every year gets you a 17% return from the government - no risk. When it comes time to buy get some more money from the government (unless the go broke and stop paying the first home owners grant). Maybe if we see a collapse in house prices they will increase the grant again?

Once you purchase your home and have some equity you can take this out and use it for investing (the interest will be cheaper than a margin loan and no risk of a margin call!!).

Until then I would say leave CFDs alone - all the flashing lights and tickers make it seem like a casino - and the only people GUARANTEED to make a killing out of the whole system are the market makers!