My long time readers would know that I don’t normally comment about financial matters, but today I will make an exception. According to FT, forex trading has gone up drastically over the past year with the number of retail investors increased to 6.5m. The effect is largely attributed to Covid-19 which causes more people to look into the financial market to supplement their income.
But authorities are starting to get concerned with many CFD providers since it entails with high risks and most of them are not as reliable as they put out to be. 2020 was a great year for many brokerage platforms, many countries have seen increased in number of sign up and deposit amount.
At the moment online brokerages in UK are regulated and licensed by FCA, and Holly Mackay from Boring Money argued that “it’s incredible that CFD providers are regulated in the same way as the investment platforms.” The reason is due to the difference between trading and investing. Most traders who use CFD to trade for price fluctuation do not share the same level of risks compared that with investors who invest in stocks and bonds – and it is evidenced by the disclosure of “Over 70 per cent of customers lose money trading CFDs” commonly found in most brokerage websites.
CFD means contract for difference and it is a financial instrument that allows traders to trade in and out of the price of its underlying asset without holding its ownership. It is a more efficient and effective way for traders.
Hence, regulating both of them in the same manner do not make any sense. By applying traditional financial rules and regulations on CFD brokers like Plus500, eToro, and others are going way too easy for them. I will be expecting the public and relevant authorities to take this matter seriously since trading is high risk endeavour and most people who lose money end up losing more than they could effort – part of it is due to leverage or trading on margin.
For example, a trader with $1,000 deposit and leverage their trade to $10,000 or ten times their original capital, and in the highly likely even of a 10% drop, they would wide up their entire account. Many traders would argue that they have their stop losses in place to prevent losing more than they could afford.
But liquidity may prove to be a problem when there aren’t enough trading volume to satisfy their stop loss price level, in other words, even if you have set a stop loss the asset price fall may surpass and your order may not be fulfilled resulting in catastrophic losses.
I know that many readers would wonder what would my recommendation be and I am very reluctant to offer any advice since i do not wish to bear any responsibility should the recommendation turns out a poor choice. If anything I’d recommend readers to check out ForexToStocks’ list at best Forex brokers in U.K. article here.
What about zero-based commission brokerage
Zero-based commission is the worst form of offer for any serious investors or traders. First of all, there is no such thing as free. Have you ever wondered how do they make money if they do not charge you any commission? There are two known ways. Firstly, they could route your oder to High Frequency Traders who front run, allowing HFT traders to exploit your orders for profit. Secondly, brokerage can charge you costly spread between bid and ask prices. To the amateur, they may seem like they are not paying for commission, but in actual fact they are paying more than they would otherwise with traditional brokers that charge a commission fee.