It is a basic rule of investment that higher returns come with higher risks. But too many ordinary people are still ignoring this precept for a very common class of financial products which leaves them open to fraud and scams.
At the weekend, The Age reported on the huge losses sustained by investors in so-called “binary options” and “contracts for difference” (CFDs). It might be more accurate to say the participants are gamblers. They bet that a share, currency, stock index or commodity will rise above or below a certain price or stay within a certain range by a certain date or time. If it doesn’t, they lose all their cash or even go into deficit, because CFDs can allow consumers to lose more than they bet.
This has become a huge market with about a million clients. The companies licensed to sell these products hold $2.9 billion in clients’ funds as security against losses. They are often marketed via aggressive advertising campaigns and, increasingly, they are spruiked uncritically on social media.
Yet without highly sophisticated financial skills, investors are very likely to lose a lot more than they win. In 2018, the Australian Securities and Investments Commission found that 80 per cent of clients who traded binary options lost money, while 72 per cent who traded CFDs lost money. Last year, a judge described the sector as a “classic example of unsophisticated retail investors seeking such financial heroin hits”.