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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
If you have a full-time job, which of the following trading styles would not suit you?
Explanation
Scalping and day trading require you to dedicate many hours of your day to monitoring your open positions. This is unlikely to suit someone with a full-time career.
True or false: a drawdown is when one losing trade or investment dents 2% of your capital and negatively impacts your overall portfolio.
Explanation
A drawdown is when you have one or more losing trades or investments that significantly dent your capital, drawing down the total value of your portfolio.
A reckless or negligent trading strategy could cause heavy losses, even in a single trade.
Say you’re building your portfolio and choose to include volatile stocks and several leveraged derivatives. Which risk profile is most applicable to your strategy?
Explanation
Leveraged derivatives and volatile stocks are considered high risk because of their complexity.
Which of the following financial instruments are leveraged?
Explanation
Contracts for difference are leveraged derivatives and allow you to take a larger position on an underlying market by paying a relatively small outlay.
Which of the following could be considered benefits of trading with leverage?
Explanation
All of the above answers (A,B and C) are true. However, leveraged trading is not exempt from risk.
You open a CFD and buy three contracts on the FTSE 100 (£10 per contract) and two contracts on the NASDAQ (£15 per contract). If both indices rise by two points, which position will give you a greater profit?
Explanation
Although you bought fewer contracts on the NASDAQ, the larger contract value increases the overall gain which matches the value of your contracts on the FTSE 100.
Your FTSE 100 profit is 3 x £10 x 2 = £60
Your NASDAQ profit is 2 x £15 x 2 = £60
Say a share in Apple Inc is currently trading at 195.420. Marie thinks that the market price will appreciate, so she purchases 100 share CFDs. By the time she closes the trade, the price has fallen to 194.210. What would her profit or loss be?
Explanation
Because Marie went long and the market fell, she didn’t benefit. Her loss would be calculated as follows:
([195.420 – 194.210] x £100) = £121, excluding any additional costs.
Which of the following statements defines the difference between a spot price and futures price?
Explanation
Spot prices refer to the price at which sellers and buyers value a particular asset right now, which means they deal with immediate transactions. On the other hand, futures prices are created with delayed payments in mind.
John believes that the price of GBP/EUR is likely to fall. If he wants to trade it with an option, which course of action will result in a profit if his prediction occurs?
Explanation
Because he thinks the market is likely to depreciate, John should buy a put option as it will give him a short position.
He’d have the right to sell at a price that he set, which may be higher than the market. The further the market drops, the more profit John could make.
True or false: a multi-product strategy includes both trading and investment products and creates diversification in your portfolio.
Explanation
While a multi-product strategy does create diversification in a portfolio, it doesn’t always include both trading and investment products – it can include different products from one category.
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