The Daily Telegraph - Saturday - Money
Interest in 'CFD trading' has surged to a record high ‘Free stock trading became gambling’
The rise of ‘free’ stockbrokers is encouraging investors to put their money into complex and risky financial products. By Sam Benstead
Commission-free share trading has taken off in Britain, but while it can cut the cost of investing for some, it is also encouraging inexperienced investors to put money into complex financial deals where the odds are stacked against them.
Hundreds of thousands of British investors now use “free” stockbrokers. Freetrade, a young start-up that offers free stock trading and £3-a-month Isas, has 300,000 users in Britain. Trading 212, another broker, has 600,000 while eToro has 1.7 million.
However, Trading 212 and eToro also offer high-risk financial products known as “contracts for difference”, which allow users to bet on the price of stocks, cryptocurrencies, commodities and other assets going up or down. They also allow “leverage”, which means a small amount of money staked can generate much bigger gains or losses. Around 75pc of ordinary savers lose money when they trade CFDs, according to the brokers themselves.
Free trading sites that offer CFDs are under the watch of the City regulator, but their game-like aspects, such as the offer of free shares if you refer a friend, and the high probability of losing money on CFDs have led to claims that their services are gambling rather than investing.
Jonathan, a reader who wished to keep his full identity private, had a history of sports gambling before he opened a Trading 212 account to buy shares without paying commission. He said he moved into using CFDs when he saw them promoted on the site. Within half an hour, he had lost £1,000 when a sudden fall in the price of oil made one of his bets, on which he had initially staked just £200, go sour. “I lost money so quickly. There is no pattern in the price movements over short periods, so it really is gambling. You can lose much more than your initial investment, which is dangerous,” he said.
“It could become a problem for people who have gambling backgrounds. There are not many tools to help you limit how much money you could lose and you can also trade 24/7.”
“Free” trading firms that also offer CFDs are advertising heavily. eToro is one of the English Premier League’s biggest sponsors, with partnerships with six clubs, and Trading 212 markets itself aggressively on social media.
There are concerns users don’t understand the complexity of using CFDs and equate it to owning stocks.
Another trader told Telegraph Money he had become hooked on CFD trading and lost £19,000 when he tried to anticipate currency movements. “I got a buzz from watching dips and rises, and from going in and out of profit, but naively assumed this form of risk-taking was informed and was less down to chance than roulette. In truth it is just as random and potentially ruinous,” he said.
GamCare, a charity that helps gamblers quit, said those who struggled to control their gambling habits might be vulnerable if they used trading sites, especially if they were not able to assess the risks involved or how volatile markets could be. Stockbrokers that do not offer CFD trading have written to the Financial Conduct Authority, the City watchdog, to complain about being grouped in with them.
Freetrade said CFDs were glorified gambling, not investing. Richard Wilson of Interactive Investor, the stockbroker, said users were tempted to sign up by free share dealing but then put under pressure to use CFDs. Andy Bell of AJ Bell, another stockbroker, said commission-free share trading was not viable unless the costs were covered by income from other products such as CFDs.
Plus500, a CFD site, said it always sought to comply with regulatory standards, including those on advertising. IG, another provider, said users could not switch to trading more complex leveraged products without meeting stricter criteria. eToro said 85pc of its customers did not use CFDs and they could do so only if they passed an appropriateness test. Trading 212 did not respond to requests for comment.