CFD clients big losers in turmoil

The "game is over" for private investors using high-risk Contracts for Difference (CFD) products to invest in the stock market, according to the managing director of Bank of Ireland Private Banking.

Mark Cunningham said investors had lost significant sums of money in CFDs during the volatility in the stock markets in recent months.

However, this had not stopped investors in general taking advantage of low share prices to buy in the market in recent weeks.

The bank has predicted that the turbulence in the stock markets could lead to a 15-20 per cent bounce in shares over the next 18 months.

Kevin Quinn, director of Bank of Ireland Private Banking, said Irish stocks could rise slightly higher than 20 per cent over the same period.

The bank said the current value of stocks has taken account of the market turmoil and presented buying opportunities, but it continued to warn investors not to use highly-leveraged products such as CFDs.

CFDs, which allow investors to borrow money to buy stocks, carry a greater risk in volatile markets.

The products, a form of derivative instrument, were popular among investors because they were exempt from stamp duty and allowed investors to leverage up their positions through borrowing.

They allow investors to speculate on movements in share prices without having to own the actual shares.

Investors placed a margin of 10-20 per cent of their nominal investment with the broker and borrowed the remainder. This made the investors vulnerable to margin calls if the value of their stocks fell.

Mr Quinn said CFDs had been "unable to withstand the recent market volatility".

Mr Cunningham said CFDs at one point accounted for "north of 50 per cent" of the trading activity in the stock market. He could not quantify CFD activity now, following the losses.

One of the largest sellers of CFDs in the Irish market has been Dublin-based broker Davy. Bank of Ireland sold its 90.4 per cent stake in the stockbroker last year for €316.6 million.

Mr Quinn said the difficulties in the stock market had "repriced risk". He predicted that investors would turn to large companies, whose stocks have been undervalued and whose earnings had "gone unrecognised".

He said the forecast for price:earnings (P/E) ratio for large companies next year was 10.3, their lowest level for five years.