By David Potts
Surely there's an easier way of exploiting oil-price movements than joining the queue to fill the tank on a Wednesday.
And what happens when the oil price jumps? You can't exactly sell the petrol back.
There's always riding your bike for a month instead of driving, I guess, which will make you a lot fitter but not all that richer.
No, there must be something else.
Well you could always buy stocks such as Woodside Petroleum or BHP Billiton, which don't come cheap, or any number of junior oil-explorer wannabes.
Again they're not much use when oil prices are falling.
Similarly, if you had a view on where the dollar might be going (good luck, the experts never get it right), then short of a trip to Disneyland or cashing in some travellers' cheques, you're pretty strapped for options.
Besides, the kind of stocks you would want to hold as an investment would benefit more if the dollar dropped. In stock-price terms, a rising dollar is almost friendless.
Futures contracts are one way to trade commodities and currencies but among day traders they've become, well, so 20th century.
They also tend to be dominated by professional players who are in a better position to manipulate the market.
Worse, there's a deadline hanging over your head because futures contracts and, for that matter, warrants and options, have an expiry date, after which they're worthless.
At least with contracts for difference (CFDs) it's hard to imagine a more level playing field: everyone has an equal chance of going broke.
Oops, did I write going broke? Slip of the keyboard. I meant getting rich.
That's a CFD for you: an almost unbelievably simple way of making money, but at a very high risk when not used properly.
Simple they might be but you have to work on making them safe.
Even the Australian Securities & Investments Commission (ASIC) says they are "much riskier than a flutter on the horses or a night at a casino".
How can that be?
Frankly they're like a margin loan on steroids. Both have margin calls if the trade goes against you but CFDs are unique in that you can lose far more money than you put up.
So their strength and weakness is you make, or lose, a lot more than your deposit.
What ASIC doesn't say is that not only is there a simple way of controlling any losses but, when used in the right way, CFDs can even make an investment safer.
You can best see this with shares.
A CFD is just a piece of paper (or rather an e-mailed contract note) that shadows to the cent the movement of the share it's following.
So what matters is not so much what the share is but what it's doing.
A CFD is just a bet that the price of a stock will rise or fall.
In fact you wouldn't even know it's a CFD but for the fact that there's an extra zero or two on the volume that you're buying or selling.
I've had a look at IG Markets' website and it's just like buying a share outright.
Only you're not. You never own the shares that your CFD is tracking, though oddly enough you do get any dividends that are paid while you're invested (and in the case of ASX CFDs, you even get franking credits).
What worries ASIC is that you're making the bet by only putting up 5 per cent, or in the case of commodities and currencies just 1 per cent, as a deposit.
Or to put it another way, you're borrowing 95 per cent to 99 per cent of your investment.
ASIC must think it's like taking out a personal loan and putting it on the pokies.
Certainly the potential leverage is breathtaking. Say BHP is trading at $35 a share. You could buy 100 shares for $3500 plus brokerage of about $30. But if you bought 100 CFDs in BHP instead, it would only cost $175 plus brokerage of $10.
Or looked at the other way, for the $3500 that would have bought 100 shares, you could buy 2000 CFDs.
You can see where this is going. If BHP's price rose 10 cents, you'd make a paper gain of $10 on the shares (which would be wiped out three times over in brokerage if you sold them). But the 2000 CFDs would be showing a profit of $200.
The maths can become quite spectacular.
A mere 1 per cent change in price can turn into a 20 per cent profit or loss.
In this case, if the price had gone up $1 a share, the return would be 57 per cent in a day.
Now for ASIC's point. Had the share price dropped $2 (not unheard of) your deposit would be wiped out and you'd owe $500. Not even the worst nag can do that to you.
That's why you shouldn't even think about CFDs unless you use stop losses.
These are pre-set prices where you cut your losses by selling if the trade goes against you.
You'd be mad to trade at home without one.
"We've been trying to promote the guaranteed stop-loss facility a lot recently," says the head of trading at CMC Markets, James Foulsham.
"It's surprisingly not used as much as you'd expect. I think it's a great benefit."
Mind you, there's an entire science about how to set a stop-loss price but the easiest way is to set a percentage, say 20 per cent, or a dollar value such as 20 cents.
So if the price of a CFD you've bought drops by these amounts, the sale is carried out automatically, no matter what.
Sadly this is easier said than done. It's human nature not to admit you're wrong (never easy, despite the amount of practice you might have had, I find) or to think if you wait just one more day the investment will come good again.
And well it might, had you not gone broke in the meantime.
So what was that I said about CFDs making investments safer?
Believe it or not, they're becoming more popular with self-managed super funds for that very reason.
You wouldn't think a day trader's potentially dangerous plaything could make a long-term share portfolio in super safer, would you?
But short-selling an S&P/ASX200 index CFD would make up for price falls in a portfolio of shares, as most DIY super funds have.