Ever since the financial crisis 9 years ago, the traditional broker industry has seen a continued exodus of clients moving assets in increasingly passive funds. Now, with the popularity of CFDs increasing, the economy is seeing the next big shift from close consumer relationships with brokers to phone apps which require little to no interaction with other people. The growing importance of these innovative financial instruments is changing the game, and it is paramount that brokers and investors alike learn more about the new possibilities they offer.
Historically, investors in the stock market were wealthy individuals who invested through brokers. The fees charged by the brokers were too high for lower-wealth individuals, which made it difficult to find out about the stock market and subsequently put money in it. In the last few decades, however, more flexible vehicles for investment have become popular, widening consumer access to investment and the variety of methods in which they do so. This has been supported by the increasing access to free financial information on the internet, through sites like Yahoo Finance.
Contracts for Differences (CFDs) make it easier for more casual investors to profit from the stock market. Designed in the 1990s, a CFD behaves like the asset underlying it; in that, someone can buy a CFD of a share of Amazon, and it will mirror the price of the share exactly. This framework allows for a simplification of the market, smaller fees and it can even pay out dividends to the holder. The main difference compared to buying a share is that the holder does not own part of the company bought, they simply make or lose money depending on how the price of the share changes. This means that the company offering the service does not have to adhere to the strict regulations associated with buying stocks, leading to lower fees.
In addition, CFDs also make it possible to leverage trades. This means that buying a stock that later increases by 10%, with a leverage of 10, will give a Return on Investment of 100%. This leads to greater potential returns, although this can also lead to larger potential losses, so great care must be taken when using these contracts. CFDs also facilitate investment from low-income individuals by enabling them to stake any amount. Shares can only be bought in integer amounts- for example, an investor wanting to buy shares valued at £200 with a £500 fund would only be able to buy 2 shares. With CFDs, as any amount of money can be invested, those with less capital have the opportunity to buy expensive stocks that they had previously been priced out of.
Traditional brokers were the first to offer CFDs, but they made extra revenue by offering a spread when buying and selling the contract. This meant that the client would pay more than the market price when buying, and would sell for less than the market price, affecting profits. Recently, however, some smaller companies offering CFDs have decided to remove the spread and offer the contracts at the mid-price with low fees.
One of the new companies offering this type of investment tool is an app called BUX, which is currently available in the UK, the Netherlands, Germany, Austria, and Italy. The app can be downloaded on Apple and Android, and the interface is simple and easy to use. After the initial onboarding, the user’s account is a ‘funBUX’ account, which uses a fake, in-app currency that allows people to trade exactly as though they were using real money. This lets users get used to the interface, the process of investing and the volatility of the markets.
Once a user feels comfortable with the app, they can put real money in, and trade with fees of either 0.1% or £0.25 per trade, whichever is the larger amount. This is much cheaper than a normal stock broker would offer, which can range from £5 – £200 depending on the service provided. This allows people with funds of just £50 to trade in the stock market, without fees being a barrier to entry. The app also allows for trading on a variety of different assets: popular stocks, indices, commodities, currencies and now even Bitcoin. This diverse offering provides a lot of flexibility and options for the app’s one million customers, making it even more appealing.
Overall, CFDs are becoming increasingly important for individuals who are interested in the stock market but only have small amounts of capital to invest, such as students. The combination of low fees with the power to be able to open and close trades at the touch of a button means CFDs are only going to increase their influence in modern investing.
More on Investing
Dwindling Risk, Passive Capture and Market Mood Swings
If one were to look up frequently used synonyms for the word risk, you might be a little surprised to...
Why Investors Cannot Outperform Simple Benchmarks
Many investors believe the ticket to riches is a superior investing strategy. If they can just get their hands on...
Deep Learning in Finance
Siri is the voice-controlled AI behind most Apple products. It can recognize speech, analyze sentiment, and answer questions. The man...