Playing with plus500
Discussion
So I get a text the other day from my brother. Seems he's made some money on Apple shares. Fair play. However, with more probing it transpires that it very nearly went tits up when the price went the wrong way and that he'd sold, then re-bought more shares at a lower price only for them to go up again. Apparently he's also made a similar sum on Silver.
He's described this a quick and easy, however I suspect beginners luck. I bet his logic went like this:
Apple are having an event, there is lots of hype, the share price is sure to rise, I will buy some shares and then sell before the excitement dies.
Fairly simple, but wrong. For a while now, I don't think this has been the case with apple events. Everyone has such high expectations of a new wonder product that when they release yet another iPhone that looks the same as the previous one, all the loud mouths come away disappointed, lamenting that apple has lost it. Usually the share price drops, rather than rise. But, a few days later, they sell 9 million of the damn things and it turns out things weren't so bad after all and confidence is restored.
It also transpires he's used plus500's leveraging and so was on the hook for £50k even though he'd only spent about a £1000. So he probably shat himself when the shares dropped. But he hung in there, doubled down and its come clean. But that, IMO, is pure blind luck.
He is a lucky person though, but I just don't want him to think this game is easy because it will burn him one day and he'll be on the hook for £1000s. Its not like he even has this money should it all go wrong, being as he is, employed on minimum wage.
Any advice you guys have that I can throw his way? Maybe I should push him to apply for a bank, then he can play using other peoples money!
Also, with regards tax. I assume some will be due on whatever profits he's made? How does that work?
He's described this a quick and easy, however I suspect beginners luck. I bet his logic went like this:
Apple are having an event, there is lots of hype, the share price is sure to rise, I will buy some shares and then sell before the excitement dies.
Fairly simple, but wrong. For a while now, I don't think this has been the case with apple events. Everyone has such high expectations of a new wonder product that when they release yet another iPhone that looks the same as the previous one, all the loud mouths come away disappointed, lamenting that apple has lost it. Usually the share price drops, rather than rise. But, a few days later, they sell 9 million of the damn things and it turns out things weren't so bad after all and confidence is restored.
It also transpires he's used plus500's leveraging and so was on the hook for £50k even though he'd only spent about a £1000. So he probably shat himself when the shares dropped. But he hung in there, doubled down and its come clean. But that, IMO, is pure blind luck.
He is a lucky person though, but I just don't want him to think this game is easy because it will burn him one day and he'll be on the hook for £1000s. Its not like he even has this money should it all go wrong, being as he is, employed on minimum wage.
Any advice you guys have that I can throw his way? Maybe I should push him to apply for a bank, then he can play using other peoples money!
Also, with regards tax. I assume some will be due on whatever profits he's made? How does that work?
Taken at face value- 50:1 leverage? I am stunned. I wouldn't have thought more than 20:1 would be available for Apple (and being available doesn't make it wise!)
I hate to say it, but I think he is being a little economical with his figures. I can't imagine how the drop in Apple would have allowed him to even maintain his account's margin requirements, and live to fight another day. Bearing in mind a 2% drop in the share price would wipe out his £1000 account. I'd expect him to have to have had at least £2500 in margin (or deposit if you like), plus more cash still as equity to allow for trading.
My only advice is if he wants to pursue it, stop using leverage. Immediately. He won't, but that's my advice anyway.
Tax depends on whether he was/is spread betting or trading CFDs. I don't know the provider, they may not offer both. If spread betting, then it is tax free (search spread betting tax), if CFDs then it is liable to CGT above the CGT allowance.
I hate to say it, but I think he is being a little economical with his figures. I can't imagine how the drop in Apple would have allowed him to even maintain his account's margin requirements, and live to fight another day. Bearing in mind a 2% drop in the share price would wipe out his £1000 account. I'd expect him to have to have had at least £2500 in margin (or deposit if you like), plus more cash still as equity to allow for trading.
My only advice is if he wants to pursue it, stop using leverage. Immediately. He won't, but that's my advice anyway.
Tax depends on whether he was/is spread betting or trading CFDs. I don't know the provider, they may not offer both. If spread betting, then it is tax free (search spread betting tax), if CFDs then it is liable to CGT above the CGT allowance.
100 shares he bought. Spent approx £1000 which I guess at the prices isn't £50k, more like $45k which is probably nearer £30k. but its still a lot of leverage and knowing him, he probably is being economical with the truth.
He could have very easily been in a world of hurt with no way out. Simply doesn't have the capital or the assets to cover much of a loss. He has some strange thoughts... wont turn the heating on because they can't afford it, yet happy to risk £1000s he doesn't have essentially gambling. And it is gambling here because he has even less of a clue about the stock market than I do and I only take a passing interest. This was nothing more than a punt, an all on black that turned out ok.
He could have very easily been in a world of hurt with no way out. Simply doesn't have the capital or the assets to cover much of a loss. He has some strange thoughts... wont turn the heating on because they can't afford it, yet happy to risk £1000s he doesn't have essentially gambling. And it is gambling here because he has even less of a clue about the stock market than I do and I only take a passing interest. This was nothing more than a punt, an all on black that turned out ok.
Edited by Otispunkmeyer on Thursday 26th September 10:40
Right, yeah that's a little closer although as you suspect he is still being economical with the truth.
Plus500 AAPL info page
The max leverage is 1:20, initial margin is 5%, and the maintenance margin is 2.5%. The initial margin he would need in his account to buy 100 Apple shares would be $2500, plus a further $1250 maintenance margin, plus further cash as equity to stop a margin call. I know you didn't ask for my feelings on leverage, but I can't say enough times how destructive it can be. Exponentially more so when combined with volatility and inexperience.
It's worth you reading this for their description on the workings of leverage.
Plus500 AAPL info page
The max leverage is 1:20, initial margin is 5%, and the maintenance margin is 2.5%. The initial margin he would need in his account to buy 100 Apple shares would be $2500, plus a further $1250 maintenance margin, plus further cash as equity to stop a margin call. I know you didn't ask for my feelings on leverage, but I can't say enough times how destructive it can be. Exponentially more so when combined with volatility and inexperience.
It's worth you reading this for their description on the workings of leverage.
Gassing Station | Finance | Top of Page | What's New | My Stuff