Who wouldn’t like some extra money, especially with prices soaring so high and inflation eating into people’s savings. In the past, increasing earnings could have been achieved by working more hours or training for a higher-paying job. But today, work is no longer rewarding. After 15 years of wage stagnation, UK workers are £11,000 worse off each year.
Fintech companies began offering a tempting alternative to the monotony of work during the same time period. Trading contracts of difference on online platforms was a way for those who had no experience in finance to make a lot of money quickly.
It’s possible that this sounds too good to true. Trading apps offering CFDs, such as eToro Trading 212 IG, and others, are required by law to warn new customers that retail investors – people who trade with their own money rather than institutional investors who invest on behalf clients – lose money when they trade CFDs. According to the platform, this could range from 71% to 87%.
If you’re speculating in the financial markets through your pension or by buying shares there’s an element of risk involved, but CFDs are complicated and risky products – so much so that they are Illegal in the US. CFDs are not the same as a traditional investment because you do not own the currency, stock or commodity. You speculate instead on the future price of an asset.
Trading and gambling have many similarities. The Financial Conduct Authority, the industry regulator in 2022, found that one fifth of retail investors who use investment apps are at risk of gambling addiction. GamCare is a gambling charity that has received support from 250 investors in the last two years. Many callers said that trading online gave them a “high”, and they would often trade all night. Some people wanted to quit their jobs in order to trade full-time. One user said: “I looked at trading apps almost 16 hours per day.” I was constantly chasing my losses and investing more money. That’s when it became clear that it wasn’t trading, but a gambling addiction.
CFDs are dangerous because you can leverage your trade. This is why gambling and CFDs are so similar. Imagine that you only have £100 – the exact amount required to purchase one share. This amount could be leveraged by five to buy a CFD worth £500. Brokers lend you money (the “margin”) to enable you to trade larger amounts. If the share prices rise by 20%, you will gain an additional £100. You can also double your original investment. However, if the price falls you may lose all of the £100. You can multiply your wins and losses.
One anonymous CFD retail investor wrote online that each loss made them more determined to chase a win. This led to more and more losses. Retail investors think that they can make money if they find the right strategy. However, unlike institutional investors, most do not possess the knowledge of historical data gained from studying and working in the finance industry for years. Trading is often a side gig, and investors base their decisions on gut feelings or piecemeal research. This is particularly risky, as any price movement can cause feelings of panic and elation. These feelings may lead to rash decisions.
Problem trading is seen more as socially acceptable than gambling. You’ll find accounts on social media platforms that offer tips on how you can make money by investing in assets instead of working. One TikTok sound clip goes as follows: “Darling I’ve said it many times, but I don’t dream of labor.”
The FCA took steps to limit the risk that retail investors face by requiring firms limit leverage and to ensure funds do not fall below a threshold. Some companies ask their users to complete a questionnaire that measures their financial knowledge to determine if they have the experience to trade CFDs. also allows users to specify how much money they are willing lose in a CFD trade.
Some apps will send users push notifications about market changes and emails that encourage them to learn more about this kind of trading. Retail investors can also access YouTube tutorials to learn how to invest without the need for apps. However, they should be aware that these are not financial advisors and CFDs come with a risk of loss. These same creators also make money by embedding affiliates links to trading platforms. YouTubers are not only warning people, but also earning money by referring them to trading platforms.
Some users will have the trading experience and knowledge to use the platforms with no problems, but others may not. There are better ways to protect users who may lose their savings or develop gambling addictions.
Trading apps should include features similar to those found in gambling apps. For example, users can ask for periods of self exclusion to be blocked for a specified period of time.
Gamban, the gambling blocking software is a step ahead of regulators and industry. It has included trading apps to its list . The FCA may go further than gambling companies and suggest that advertising is banned. Trading apps advertise to customers in a variety of ways, including on football hoardings, taxi wraps and online. They do this knowing that most will lose their money. Trading companies charge a fee whether users win or not.
There is no way to become rich quickly, and neither is there a quick fix. It is a damning sign that people are willing to take a small risk of winning money through a trading application rather than rely on their work as a reliable financial safety net. There will always be people willing to gamble until work pays.