WWho doesn’t want some extra cash, especially when prices are through the roof and inflation is eating into people’s savings? More than a decade ago, the answer to increasing income might have been to work longer hours or train for a higher-paying job, but these days work doesn’t pay anymore. Workers in the UK are £11,000 a year worse off after 15 years of wage stagnation.
During the same period, financial technology (fintech for short) companies began to offer an enticing alternative to the drudgery of work. Those who were new to the world of finance could make a lot of money quickly by trading something called contracts for difference (CFDs) on online platforms.
If all of this sounds too good to be true, that’s because it can be. By law, trading apps that offer CFDs, such as eToro, Trading 212, IG, and others, are required to issue disclaimers to any new clients advising that retail investors (people who trade with their own cash rather than institutional investors, who invest on behalf of clients) lose money when trading CFDs. Depending on the platform, it could be between 71% and 87% of investors.
Whether you are speculating in the financial markets through your pension or buying stocks, there is an element of risk involved, but CFDs are complicated and risky products, so much so that they are illegal in the US. When you trade CFDs, you are not proprietary. of stocks, commodities, or currencies as you do in a direct investment. Instead, you speculate on how the future price of that asset may change.
The similarities between trading and gambling are hard to ignore. In 2022, the industry regulator, the Financial Conduct Authority (FCA), found that one fifth of retail investing app users were at risk of problem gambling. In the last two years, 250 investors have approached GamCare, the gambling charity, for support. Callers reported getting a “hold” while trading online, often trading through the night. Some wanted to quit their jobs so they could trade full time. According to one user: “I was looking at the business apps almost 16 hours a day. I kept putting my money away and chasing losses… That’s when I realized I wasn’t trading anymore, it was a gambling problem.”
What makes CFDs so dangerous, and the comparison to gambling even more important, is that you can “leverage” your trade. Imagine that you have £100, exactly the amount needed to buy a share. You could leverage this amount for five and buy a CFD on shares worth £500. The broker essentially lends you some money, the ‘margin’, to make a larger trade. If the share price goes up 20%, you earn an extra £100 and double your initial investment, but if it goes down, you could lose the entire £100, maybe more. Your profits and, in turn, your losses are amplified.
According to a retail CFD investor who wrote anonymously online, each loss made him more determined to chasing a win, resulting in more and more losses. Retail investors believe that if they find the right strategy, they can make money, but unlike institutional investors, many do not have the level of understanding of historical market data that comes from years of studying and working in finance. Instead, trading is more of a side hustle and investors make decisions based on fragmented research or even gut feeling. The latter is especially risky: any fluctuations in price movements can trigger feelings of panic or euphoria, resulting in rash decisions.
Compared to gambling, problematic trading is more likely to be seen as a socially acceptable activity. Search “passive income” on any social media platform and you’ll see account after account offering advice on how to make money from assets instead of work. As a viral sound clip on TikTok reads: “Honey, I’ve told you several times before, I don’t have my dream job, I don’t dream of the job.”
The FCA has taken steps to limit the risk that retail investors are exposed to by requiring companies to limit amounts of leverage and ensure that funds do not fall below a certain threshold. In addition to these measures, some companies also ask users to complete a questionnaire to test their financial knowledge in order to warn them if they are not experienced enough to trade CFDs, and allow users to set an amount of money they are willing to lose on a trade.
However, some apps send push notifications about market developments and marketing emails that encourage users to learn about this type of trading. Outside of the apps, retail investors can access YouTube trading tutorials with the standard disclaimer that they are not reputable financial advisors and CFDs carry the risk of loss. At the same time, these same creators make money by adding affiliate links to trading platforms when viewers click. YouTubers may be offering warnings, but they are also making money by referring people to the platforms.
Of course, there will be users who have the trading knowledge and experience, as well as the extra money, to use these platforms smoothly and with full knowledge of the risks. But better measures are needed to protect users who are at risk of losing their savings and developing gambling problems.
There is a case for commercial applications to integrate features used by gambling applications, such as self-exclusion periods where users ask a provider to block their access for a certain period of time.
Gamban, a gambling blocking software, is ahead of the industry and regulators and has added commercial applications to its list. The FCA could go one step further than the gaming industry and recommend that advertising be banned. From football billboards to taxi wraps to online advertising, business applications are advertising to customers knowing that most of them will lose money. Whether users win or lose, trading companies charge a fee.
These measures would certainly help, but there’s no quick fix, just like there’s no get-rich-quick way. That people would rather have a small chance to make money on a trading app than rely on work that provides them with a strong financial safety net is damning. Until the job pays, there will always be someone willing to take a chance elsewhere.