Lever­age can cut both ways

In the short term, it’s all about the move­ment of prices and a quick exit, re­ports Robin Bromby

The Weekend Australian - Review - - Wealth -

PUTTING in an or­der to buy 1000 BHP Bil­li­ton shares will cost, de­pend­ing on the price any par­tic­u­lar day, some­thing north of $ 40,000. Jeff Car­tridge can get the same ex­po­sure for an out­lay of around $ 1200.

That is be­cause Car­tridge trades con­tracts for dif­fer­ences ( CFDs). Un­like the share in­vestor, who is prob­a­bly in there for the long term, Car­tridge will prob­a­bly be out within weeks — ei­ther with a loss or profit.

The long- term share in­vestor prob­a­bly doesn’t worry about move­ments of a few dol­lars ei­ther way. He or she owns the un­der­ly­ing stock.

Car­tridge owns only the profit or loss mar­gin. That $ 2 a share move­ment is what it is all about; noth­ing else mat­ters. It’s all about the lever­age. But it is also about the abil­ity to move from one se­cu­rity to an­other. Among his trade claims, there’s the 400 per cent profit on a New Zealand dol­lar- Ja­panese yen cur­rency con­tract, a 100 per cent gain on trad­ing gold CFDs and trad­ing prof­its in shares of 76 per cent over three months.

He’s the au­thor of the lo­cal text­book Su­per­charge Your Trad­ing with CFDs: An Aus­tralian Guide to Trad­ing Con­tracts for Dif­fer­ences.

Car­tridge got into trad­ing back in 1999 af­ter work­ing for some years as an en­gi­neer. In 1999 and 2000, he traded tech­nol­ogy stocks as that sec­tor boomed — at least in terms of share prices, if not in terms of al­ways build­ing prof­itable busi­nesses. ‘‘ Mak­ing money was a breeze,’’ he re­calls. Once that bub­ble burst, how­ever, the easy money dried up, and Car­tridge had to look for other ways to de­liver prof­its. He went into in­stru­ments such as op­tions and war­rants, and then seized upon CFDs when they be­came avail­able in Aus­tralia in 2002.

They opened up a whole new world of trad­ing — com­modi­ties, cur­ren­cies, Asian in­dices, US stocks — you name it.

All th­ese could now be traded through CFDs at the punch of a com­puter key.

Now based across the Tas­man in Christchurch, but spend­ing more time in Syd­ney now than in New Zealand, his present ex­po­sures in­clude gold and sil­ver and Aus­tralian shares.

At the mo­ment he is long on pre­cious met­als but the di­rec­tion of trends — up or down — is no real con­cern, just so long as he has picked the right side of the trade. It is the volatil­ity that makes for prof­its.

‘‘ It doesn’t mat­ter just so long as the price is mov­ing,’’ he says.

He got into sil­ver when it was about $ US14.50 an ounce, then sold as it headed up to $ US16.20/ oz, get­ting out at $ US15, watch­ing the price fall, and buy­ing back in at $ US14/ oz. But he’s no high roller, know­ing that you can make big losses if the guess is wrong.

So he keeps be­tween $ 10,000 and $ 20,000 in the trad­ing ac­count and also has a batch of long- term in­vest­ments sep­a­rate from the CFD trad­ing.

In the past year he’s cleared about $ 50,000 from CFD trades, about one- sixth of his in­vest­ment in­come — but, of course, the profit per­cent­ages are much higher mul­ti­ples than on other parts of his port­fo­lio.

Ac­cord­ing to The Times in Lon­don, only about one- fifth of traders us­ing CFDs and spread- bet­ting make money. That was based on a study by City Univer­sity Lon­don’s busi­ness school. But some of that one- fifth made hand­some re­turns. The news­pa­per cited 80- year- old Douglas Cow­p­land, who opened a CFD ac­count five years ago with Bar­clays Stock­bro­kers.

He in­vested £ 50,000, and now has about £ 1 mil­lion pounds in that ac­count, and that’s af­ter buy­ing two yachts in the Car­ribean.

Car­tridge knows of in­vestors here whose ac­count val­ues can move as much as $ 3 mil­lion in a day when the mar­kets are volatile, but he is much more cau­tious.

‘‘ Lever­age is a dou­ble- edged sword,’’ he cau­tions. His key to suc­cess is risk man­age­ment, and look­ing to pre­serve his cap­i­tal.

He takes prof­its — in other words, he takes money off the ta­ble when a trade goes right — but al­ways has a buf­fer of money in the ac­count for when deals go bad. He never com­mits too big a slice of his pot to any one deal. He has seen traders wiped out — and has no in­ten­tion of fol­low­ing in their foot­steps.

Su­per­charged trad­ing: CFDs opened a whole new world for Jeff Car­tridge

Pic­ture: Bob Fin­layson

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