In this instalment of being taught by a man who refuses to learn, Stockhead’s veteran un-Zen motorcyclist and avidly awful poker player Gregor Stronach does his best to warn you about the Evils of Gambling on the stock market.

It could, and frequently has, been argued that this “investing” caper is little more than gambling dressed up in a business suit.

And that’s because it is.

But there’s a difference between “buying a few shares and hoping to make a few bob” and “outright degenerate gambling”, in the same way there’s a difference between expressing your love for your pet dog and demonstrating a more physical kind of love for Fido. Somewhere public. Like, in a church. Or a pet cemetery.

Because there are some people for whom buying shares, watching price movements, and seeing a portfolio grow in value a bit quicker than if you’d listened to your parents and put that money in a term deposit because “That’s what the smart people do, Gregor. Honestly…” is enough of a thrill.

But for others, that’s not enough. There’s not enough at stake to make it exciting. There needs to be more of an edge, a knowledge that you’re either going to get rich, or die trying.

Which is why very recent news of a class action lawsuit seeking to claw back “hundreds of millions of dollars” Aussie investors have lost “trading controversial financial products called contracts for difference (CFDs)” wasn’t really all that much of a surprise.

I’ll get to an explanation of what CFDs are in a moment – but for now, I’d suggest two things:

  1. It’s worth taking a look at risk and other basics for which the market is notorious, and
  2. “Controversial trading products” is a frighteningly positive euphemism for a mechanism so risky it almost beggars belief.

I should preface what follows with a caveat: I’m a relative newcomer to all this stockbusiness marketbroking stuff, so if you’re reading this in the hope that you’re going to learn something, be advised that I’m learning right alongside you.

That said, let’s get down to brass tacks.


Investing, or gambling? You get to choose.

There are several types of investors, and I honestly have neither the time nor the inclination to try to list them all for you today – but the highlights applicable to this particular yarn are as follows.

There are your Very Serious investor-types – the people whose great-great-grandfather got talked into buying shares over a pint of beer by William Barton, one of the first stock brokers in Australia, whose son went on to become Australia’s first Prime Minister, forever cementing an unbreakable (for better or worse) bond between the markets and politics.

Your serious types are in it for the long haul, drip-feeding the family fortune into the kind of established companies that only a nuclear holocaust could see them lose substantial value in the long term.

Those people are Boring.

Then there are the Stockbroker types – the guys (and chicks – let’s not be sexist) who live, eat, breathe and dream stock tickers, trading prices and who categorise their morning bowel movements in terms of Volume Weighted Adjusted Pounds, jotting it down in a notepad by the dunny.

Those people are less-boring, but… I’m sure at some point you’ve met one in a bar, and prayed silently for death while they rabbit on about “how good Twitter’s going to be in a week or two – trust me, bro”.

‘At some point, a person – a smart person – figured out that the best money to risk on a ride or die investment is, obviously, someone else’s.’

There’s your Day-Trader types – perennially hyper-manic caffeine fuelled maniacs with a five monitor setup, a dedicated zero-ping line direct to the ASX and a home-brewed algo that is always about two days’ work away from being a 100% iron-clad foolproof winner.

And then there’s the Gamblers – the folks who will happily spend days, or even weeks, on their due diligence before scrapping the lot and dropping every penny they have into some random YOLO garbage bet because “some dude on Reddit said it would be funny”.

The thing that they all have in common, with each other and with you and me, is that we’re in this game to try to make money… because that’s what the market’s about.

In fact, it’s what the market has always been about – a vehicle for well-dressed people from fancy backgrounds to have a respectable Gentleman’s Flutter without having to rub shoulders with the proles and the hoi-polloi at the dishlickers in Dapto on a wintery Wednesday night.

But the old days are over and things have moved with the times. Buying some shares and then sticking them away in a safe deposit box is hugely boring.

There’s no thrill, no excitement. Just a vanishingly small risk that whatever rock solid institute of Australian business you’ve sunk your money into will eventually evaporate into nothing.

Don’t even get me started on ETFs.

Fortunately, people who enjoy buying stock and watching it grow like a glacier started looking around for ways to make their investment more interesting, and – the market being the market – instruments and means to make a lot more money in a far shorter period of time were invented.


Chuck a hundy on a speccie

As more and more companies started listing and offering shares, the market – through the sheer weight of mathematics – became a riskier environment. The handful of top-quality AAA never-lose-value companies were surrounded by a gaggle of smaller, less refined companies.

And those companies, it became apparent, were where fast money could be made, on the basis that the company’s performance and fortunes could turn on a dime, and 3% average annual earnings gave way to market movements in the double-digit percentages per hour.

The modern equivalent can be found lurking all over the ASX, but there’s a preponderance of them in our beloved Materials, Tech and Healthcare spaces.

Little companies with huge dreams, which exist in something akin to the box that contains Schrodinger’s Cat, and could – at any moment – be worth $0.01 or $1.50 a share, depending on when you look to see where it’s at.

This is the New Normal of modern trading, and throwing a few hundred onto a penny stock gold explorer carries with it the thrill of having a punt, with the vicarious joy of the company itself when it drills into a bonanza grade find and makes everyone stupidly wealthy.

But of course, that’s a risky bet. Even the team at the helm of the actual boots-on-the-ground exploration don’t know for sure that they’re standing on top of a fortune – so the chances of some suburban yahoo with a trading app on their phone knowing what’s up are even slimmer than that.


A lever big enough to lose the Earth

At some point, a person – a smart person – figured out that the best money to risk on a ride or die investment is, obviously, someone else’s.

Especially if you have no intention of paying it back, but that’s not how the world works so don’t get any dumb ideas.

So, they borrowed money to buy some stock, on the premise that the investment they were about to make was A Sure Thing, and that they would be able to give the money back (possibly with a little sumthin’-sumthin’ on top for your troubles) in due course.

And just like that, margin trading – risking borrowed money to invest – was born. Kind of.

“Margin” refers to a small sum of funds you can put forward as collateral, in order to access “leverage”, which is a means of using debt to amplify the value of your trade.

Let’s use a real world example:

You know a guy (let’s call him Harry) who sells pot by the ounce for $400. You don’t have any money, but you do have two excellent Playstation3 games and a nice bottle of wine you’ve been saving for a special occasion.

So you do a deal with Harry that he loans you the ounce of pot, on the promise that you’ll pay him later – and offer your two best PlayStation3 games and the wine as collateral.

You go home, break the ounce down into 10 smaller bags, fluff it up a bit so that it looks like there’s more in each portion, and then sell those 10 bags at $50 a pop, for a total of $500.

Congratulations! You’ve used a form of debt financing to make money – using your margin (the Playstation discs and the wine) to access the leverage (the remaining $360 you owe Harry) to buy the security (the dope) which you then own, and can sell for a profit.

Soon, through the magic of leverage, you’ll have enough margin to start buying the weed from Harry by the pound, and some nice policemen will come visit you at home.


But what if I told you there’s a way that’s legal?

You can apply broadly the same principle using an instrument known as leveraged margin trading – and this is the point at which common sense goes sailing out the window, usually followed in short order by whoever’s on the wrong end of the deal.

Leveraged margin trading is still using someone else’s money to trade shares (or forex, or – if you have recently suffered a catastrophic brain injury – crypto), but with the added excitement of being able to add a multiplying factor to the trade.

It works like this: If you have $1,000, you could buy $1,000 worth of shares and, if the price goes up 10%, you will have $1,100 – a $100 profit.

Well done you, aren’t you clever, go straight to the top of the class and jump off.

Or, you could use that $1,000 as collateral and tip into a 10x leveraged margin trade, so that if the stock goes up 10%, your profit will be $1,000, instead of just $100, which is what makes them so attractive to greedy little pigs.

These sorts of trades are usually offered with the following attachments:

  1. A very strict time limit before the money has to be paid back.
  2. A margin fee, which can turn out to be Quite Large.
  3. A contract premium, which can vary widely depending on how risky the trade is.

If it all goes to plan, and the securities you bought with your borrowed money go to the moon, your $1,000 investment could bring in a lot of money, even after the broker has taken their pound of flesh from the deal.

Brokers will always get their pound of flesh because they are the ones who both designed the game, and get to operate it on their terms.

And brokers are not in the business of giving you free money. Ever.

‘My mate Julian is quite a smart fella, with a decent income and a life outside of work probably best described as ‘comfortable’. One day, Julian discovered leveraged margin trading, and now Julian sleeps in a park. The end.’

But, like bread left too long in a toaster on the “crumpet” setting, it does have a dark side – if your trade goes wrong you are, for want of a better term, f-cked.

When your leveraged margin bet moves the wrong way, the broker will need to know that you have enough money to be able to pay your side of the debt. So they start making margin calls – which is “Stock Market” for “Show me you can pay up right now, or I am taking everything that’s already on the table and going home”.

You will basically haemorrhage money trying to keep things open in the hope there’s a turnaround – right up to the point where you can no longer pay, the whole thing gets liquidated and you lose everything.

It is – and I cannot stress this enough – an incredibly foolish thing to even think about doing, if either of the following things are true about you:

  1. If you are new to the market, and don’t 100% know how it works.
  2. You are not 100% prepared to lose tons of money in a very rapid fashion when you back the wrong horse.

Here’s a quick case study to help illustrate my point:

My mate Julian is quite a smart fella, with a decent income and a life outside of work probably best described as “comfortable”. One day, Julian discovered leveraged margin trading, and now Julian sleeps in a park. The end.

It’s utter madness, as you can see… but the best part is that it gets even worse.

Leverage of 10x is at the low end of the spectrum, and in markets such as Forex trading, 100x leverage is not uncommon.

Which means you can plonk down $1,000 and burn through every single penny you have trying your best to keep your head above water before things start swinging your way.

But that almost never happens – because if it was actually that easy, then every half-wit with a Forex trading app on their phone would be driving around your neighbourhood in a diamond-plated Bugatti.


My doctor says I’ve got CFD. You should get tested.

What if I told you that there was a way that you could effectively bet on which way the value of any asset – and I use the term “asset” in about as loose a way as you could possibly even imagine – is heading, without needing to buy or borrow that asset, at all?

Like, you could just find someone who might disagree with your assessment that in two weeks’ time BHP shares will be worth about $10 a pop, and make what amounts to an outright wager called a Contract for Difference (CFD).

A CFD is a binding contract between two parties, involving “Asset A”, currently worth $10 a share.

Person A says “I reckon Asset A will be worth $8 a share in two weeks”, and Person B says “You’re an idiot”, and before you know it you’ve entered into a contract to exchange the difference between the opening and closing price of your position, without either of you having to go through the boring monotony of buying the actual asset.

Of course, you will have to pick a direction you reckon it’s going to move – if you think the price is going to fall, then you “go short”, and if you think it’ll go higher, you “go long”.

You can set a time limit on it, or a value limit, or – and this bit’s kinda important – you can opt to close your position earlier than either, if you’re a gigantic baby with no balls concerned that you’ve misread the market and you’re on the wrong side of the contract.

Obviously, you’re not going to get rich in a day or two, unless you’ve already got barrels of money to play with.

But that’s okay, because most places where you can organise a CFD coin toss will let you toss that coin to your heart’s content, leveraged harder than a burglar with a crowbar – but just be aware that if you’re making leveraged CFD bets, you won’t even have the underlying value of the asset to offset the losses you incur.

I want to say this again, because this bit is not a joke – a 100x leveraged $1,000 Forex CFD that moves the wrong way will cost you everything you can throw at it each time it ticks against you, until you run out of money to pay each margin call and your broker liquidates the who shebang and you lose a ton of money.

It’s safe to say, then, that by any reasonable measure, CFDs are so egregiously and aggressively loaded with risk that the lawsuit I mentioned at the top of this piece has come to pass.

Law firm, Piper Alderman, and the world’s largest legal finance firm, Omni Bridgeway, have commenced a class action against UK-based IG Markets on behalf of roughly 20,000 Australians who have lost staggering sums of money on these things

The legal beagles say that IG Markets “failed to adequately assess investors’ objectives, financial situations and inadequately disclosed the risks of CFDs”, all the way up to the point when ASIC grabbed the handbrake to protect inexperienced investors a couple of years ago – a move prompted when it came to light that 72% of the retail investors punting on CFDs lost their money.

So, on that happy note, remember to invest with your head and not over it, and as always, Invest Responsibly.