Wednesday, 20 February 2008

Burnt From Shares/Stocks

The recent volatility in the share/stock market has burnt many, many people. Some of my friends have lost or are losing a great deal of money on their shares.

The situation is especially bad for people who uses leveraged products like margin lending and Contract for Difference (CFD) to increase the size of their portfolios through borrowed money.

One friend, Fillip, has lost $10K in the last couple of months trading shares on the CFD platform. That's easily a few months worth of salary down the drain. With CFD accounts, you can turn $500 into a $10,000 position; that's a loan of $9,500 or 95%! The risk from this is so huge. Only a small change in the underlying share price against you is needed to give you a sizable loss (and vice versa). So when the share market crashed, the losses were greatly magnified.

Another buddy, Khris, is losing $12K on his portfolio, but he hasn't sold any shares yet. So technically he hasn't made any real loss. Some of the shares he bought a few months ago are now down upto 70% in value! But Chris is more optimistic than most people as he sees his investments as a long term strategy and believes that prices will recover sooner or later. You might have to wait a while though Chris! But good luck mate.

As for myself, I have some managed/mutual fund investments which haven't been doing too good either. As I said in my earlier post (Share Market Plunge), the fund dropped 18% in value in January alone or $8,000 on my portfolio. And the fact that I also geared my fund means that the drop in share market is magnified in my fund portfolio. But it doesn't worry me too much as it is a long term investment.

Every investor right now is wishing and hoping that things will improve, but only time will tell.