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