Inside Money: ASIC clears the smoke from CFDs

Maybe the tobacco industry can serve as a model: Warning - CFD use may seriously harm your wealth. Photo / Brett Phibbs

And speaking of retail investors getting into investment products they don't really understand have a read of this lovely release from the Australian Securities and Investments Commission (ASIC).

In the full report which you can access via the press release, ASIC, Australia's equivalent of our Securities Commission, digs deeply into the mystery known as 'contracts for difference' - or CFDs.

You may be familiar with the acronym from that odious little TV ad featuring a smarmy bloke on a golf course and the catch-phrase "trade from anywhere". Quite apart from wondering why you'd choose a golf course from the almost infinite variety of trading places the world has on offer, the ad disturbs me.

CMC Markets, the company behind the ad, is a perfectly respectable entity, and I'm sure people do make a killing trading CFDs via their iPhone on the back nine. But the image skews reality way too far, even by the flexible standards of marketing.

As the ASIC report points out, that marketing has been extremely successful in recent years, luring many rookie retail investors into what at heart is leveraged punting.

I haven't seen a similar CFD effort from the Securities Commission but something is overdue here.

Sure, go ahead and promote the dream of boundless wealth attained without effort but the downside of CFDs should be more clearly explained in the marketing materials.

According to ASIC, CFDs pose the following risks for retail investors:

* great losses due to high leverage ratios;
* unanticipated or poorly managed margin calls;
* significant counterparty risks (i.e. the risk that the issuer or another party fails to meet their obligations to the investor);
* 'gapping' that can result from time delays between the placement and execution of trader orders;
* limitations of the explanation of key risks and operational features of CFDs in many disclosure documents; and
* the risk that CFDs are likely to be an inherently unsuitable investment for some retail investors.

Maybe the tobacco industry can serve as a model: Warning - CFD use may seriously harm your wealth.