The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
Stock Splits Definition & Profit | Trading Forex
The subject of stock splits can cause a lot of confusion for traders and investors in stocks. In this article I am going to explain what stock splits are, why companies choose to split their stock, and finally explore whether stock splits provide any opportunity to traders to generate profit from the market.
What are Stock Splits?
The dictionary definition of a “stock split” is a corporate action where a company divides its shares into multiples. For example, company ABC Incorporated legally decides and announces that each of its ordinary common stock are going to split into ten shares (this would be known as a “ten-for-one” stock split). This has the effect of every stock owner seeing their number of new shares owned as multiplied by the split factor. All other things remaining equal, if each of the old shares are worth $100, then the new split shares will be worth $10 each. This is something I will explore more deeply later in this article.Why Companies Split their Stock
It can be seen from the simple explanation in the preceding paragraph that this is a very simple and seemingly trivial and pointless procedure. Why do companies bother splitting their stock? Well, there are a number of reasons why it is useful for companies to undertake this procedure:- A stock split, as we have already seen, should have the effect of bringing down the price by the factor of the split. This can be very useful if the share price has risen by a great deal and become relatively expensive per share, which can have the effect of deterring small investors. For example, Apple Inc. undertook a 7 for 1 stock split in the summer of 2014 largely because its share price had risen steadily to reach a spectacular $645 per share. The split by a factor of 7 reduced the price to a much more affordable $92 per share.
- A less widely understood reason why a company might choose to undertake a stock split is to generate greater liquidity in its stock. The price does not just fall, the number of shares in circulation increases too, by the factor of the split. This can cause not only greater accessibility to buyers as we have seen, but also it gives stock owners greater options to sell smaller holdings and these two factors can combine to generate greater market liquidity in the stock. Greater liquidity may have the effect of lowering the bid-ask spread that is quoted by market makers dealing in the stock on approved exchanges, which again makes trading in the stock easier and creates a better market for the company’s shares.
Can Traders Take Advantage of Stock Splits?
Academic studies undertaken since the 1990s have tended to indicate that stocks which have just been split tend to outperform the market as a whole for a while. Whilst this might seem too good to be true, a quick consideration of some of the likely reasons why this might be true show it is quite plausible:- Companies tend to split their shares when the price has become too “expensive”. Consider that for the price to have become too “expensive” it is very likely that the price has been rising for some time, and is also either at or very close to its all-time high price. This means that stocks that are split have probably been exhibiting excellent bullish momentum, which several academic studies have shown is a winning trading strategy if applied consistently.
- Companies are also more favorably inclined to split their shares when the Board of Directors believe that the share price is likely to keep rising and the company is likely to continue performing strongly in its market. This is not infallible, but such “insider” confidence can be a good indication of a company whose share price has a good prospect of rising in the near term.
- As described earlier, the action of a stock split usually has the effect of increasing liquidity and opening up more of the retail market. This can generate some bullish action as the split will attract retail buyers, driving the price up beyond the split factor’s division of the pre-split share price.
Of course, you could also draw another logical conclusion, which would be to short stocks which have just undergone reverse splits of their stock. Bear in mind that the optimal time period to hold stocks short tends to be less than when holding them long.
Unfortunately there are no ETFs offering recently split stocks, so you won’t be able to buy these stocks through most Forex brokers. Traders implementing this type of strategy would have to identify the stocks and buy them directly.
Source
Stock Splits Definition & Profit | Trading Forex
The subject of stock splits can cause a lot of confusion for traders and investors in stocks. In this article I am going to explain what stock splits are, why companies choose to split their stock, and finally explore whether stock splits provide any opportunity to traders to generate profit from the market.
What are Stock Splits?
The dictionary definition of a “stock split” is a corporate action where a company divides its shares into multiples. For example, company ABC Incorporated legally decides and announces that each of its ordinary common stock are going to split into ten shares (this would be known as a “ten-for-one” stock split). This has the effect of every stock owner seeing their number of new shares owned as multiplied by the split factor. All other things remaining equal, if each of the old shares are worth $100, then the new split shares will be worth $10 each. This is something I will explore more deeply later in this article.Why Companies Split their Stock
It can be seen from the simple explanation in the preceding paragraph that this is a very simple and seemingly trivial and pointless procedure. Why do companies bother splitting their stock? Well, there are a number of reasons why it is useful for companies to undertake this procedure:- A stock split, as we have already seen, should have the effect of bringing down the price by the factor of the split. This can be very useful if the share price has risen by a great deal and become relatively expensive per share, which can have the effect of deterring small investors. For example, Apple Inc. undertook a 7 for 1 stock split in the summer of 2014 largely because its share price had risen steadily to reach a spectacular $645 per share. The split by a factor of 7 reduced the price to a much more affordable $92 per share.
- A less widely understood reason why a company might choose to undertake a stock split is to generate greater liquidity in its stock. The price does not just fall, the number of shares in circulation increases too, by the factor of the split. This can cause not only greater accessibility to buyers as we have seen, but also it gives stock owners greater options to sell smaller holdings and these two factors can combine to generate greater market liquidity in the stock. Greater liquidity may have the effect of lowering the bid-ask spread that is quoted by market makers dealing in the stock on approved exchanges, which again makes trading in the stock easier and creates a better market for the company’s shares.
Can Traders Take Advantage of Stock Splits?
Academic studies undertaken since the 1990s have tended to indicate that stocks which have just been split tend to outperform the market as a whole for a while. Whilst this might seem too good to be true, a quick consideration of some of the likely reasons why this might be true show it is quite plausible:- Companies tend to split their shares when the price has become too “expensive”. Consider that for the price to have become too “expensive” it is very likely that the price has been rising for some time, and is also either at or very close to its all-time high price. This means that stocks that are split have probably been exhibiting excellent bullish momentum, which several academic studies have shown is a winning trading strategy if applied consistently.
- Companies are also more favorably inclined to split their shares when the Board of Directors believe that the share price is likely to keep rising and the company is likely to continue performing strongly in its market. This is not infallible, but such “insider” confidence can be a good indication of a company whose share price has a good prospect of rising in the near term.
- As described earlier, the action of a stock split usually has the effect of increasing liquidity and opening up more of the retail market. This can generate some bullish action as the split will attract retail buyers, driving the price up beyond the split factor’s division of the pre-split share price.
Of course, you could also draw another logical conclusion, which would be to short stocks which have just undergone reverse splits of their stock. Bear in mind that the optimal time period to hold stocks short tends to be less than when holding them long.
Unfortunately there are no ETFs offering recently split stocks, so you won’t be able to buy these stocks through most Forex brokers. Traders implementing this type of strategy would have to identify the stocks and buy them directly.
Source
Stock Splits Definition & Profit | Trading Forex
The subject of stock splits can cause a lot of confusion for traders and investors in stocks. In this article I am going to explain what stock splits are, why companies choose to split their stock, and finally explore whether stock splits provide any opportunity to traders to generate profit from the market.
What are Stock Splits?
The dictionary definition of a “stock split” is a corporate action where a company divides its shares into multiples. For example, company ABC Incorporated legally decides and announces that each of its ordinary common stock are going to split into ten shares (this would be known as a “ten-for-one” stock split). This has the effect of every stock owner seeing their number of new shares owned as multiplied by the split factor. All other things remaining equal, if each of the old shares are worth $100, then the new split shares will be worth $10 each. This is something I will explore more deeply later in this article.Why Companies Split their Stock
It can be seen from the simple explanation in the preceding paragraph that this is a very simple and seemingly trivial and pointless procedure. Why do companies bother splitting their stock? Well, there are a number of reasons why it is useful for companies to undertake this procedure:- A stock split, as we have already seen, should have the effect of bringing down the price by the factor of the split. This can be very useful if the share price has risen by a great deal and become relatively expensive per share, which can have the effect of deterring small investors. For example, Apple Inc. undertook a 7 for 1 stock split in the summer of 2014 largely because its share price had risen steadily to reach a spectacular $645 per share. The split by a factor of 7 reduced the price to a much more affordable $92 per share.
- A less widely understood reason why a company might choose to undertake a stock split is to generate greater liquidity in its stock. The price does not just fall, the number of shares in circulation increases too, by the factor of the split. This can cause not only greater accessibility to buyers as we have seen, but also it gives stock owners greater options to sell smaller holdings and these two factors can combine to generate greater market liquidity in the stock. Greater liquidity may have the effect of lowering the bid-ask spread that is quoted by market makers dealing in the stock on approved exchanges, which again makes trading in the stock easier and creates a better market for the company’s shares.
Can Traders Take Advantage of Stock Splits?
Academic studies undertaken since the 1990s have tended to indicate that stocks which have just been split tend to outperform the market as a whole for a while. Whilst this might seem too good to be true, a quick consideration of some of the likely reasons why this might be true show it is quite plausible:- Companies tend to split their shares when the price has become too “expensive”. Consider that for the price to have become too “expensive” it is very likely that the price has been rising for some time, and is also either at or very close to its all-time high price. This means that stocks that are split have probably been exhibiting excellent bullish momentum, which several academic studies have shown is a winning trading strategy if applied consistently.
- Companies are also more favorably inclined to split their shares when the Board of Directors believe that the share price is likely to keep rising and the company is likely to continue performing strongly in its market. This is not infallible, but such “insider” confidence can be a good indication of a company whose share price has a good prospect of rising in the near term.
- As described earlier, the action of a stock split usually has the effect of increasing liquidity and opening up more of the retail market. This can generate some bullish action as the split will attract retail buyers, driving the price up beyond the split factor’s division of the pre-split share price.
Of course, you could also draw another logical conclusion, which would be to short stocks which have just undergone reverse splits of their stock. Bear in mind that the optimal time period to hold stocks short tends to be less than when holding them long.
Unfortunately there are no ETFs offering recently split stocks, so you won’t be able to buy these stocks through most Forex brokers. Traders implementing this type of strategy would have to identify the stocks and buy them directly.
Source
Stock Splits Definition & Profit | Trading Forex
The subject of stock splits can cause a lot of confusion for traders and investors in stocks. In this article I am going to explain what stock splits are, why companies choose to split their stock, and finally explore whether stock splits provide any opportunity to traders to generate profit from the market.
What are Stock Splits?
The dictionary definition of a “stock split” is a corporate action where a company divides its shares into multiples. For example, company ABC Incorporated legally decides and announces that each of its ordinary common stock are going to split into ten shares (this would be known as a “ten-for-one” stock split). This has the effect of every stock owner seeing their number of new shares owned as multiplied by the split factor. All other things remaining equal, if each of the old shares are worth $100, then the new split shares will be worth $10 each. This is something I will explore more deeply later in this article.Why Companies Split their Stock
It can be seen from the simple explanation in the preceding paragraph that this is a very simple and seemingly trivial and pointless procedure. Why do companies bother splitting their stock? Well, there are a number of reasons why it is useful for companies to undertake this procedure:- A stock split, as we have already seen, should have the effect of bringing down the price by the factor of the split. This can be very useful if the share price has risen by a great deal and become relatively expensive per share, which can have the effect of deterring small investors. For example, Apple Inc. undertook a 7 for 1 stock split in the summer of 2014 largely because its share price had risen steadily to reach a spectacular $645 per share. The split by a factor of 7 reduced the price to a much more affordable $92 per share.
- A less widely understood reason why a company might choose to undertake a stock split is to generate greater liquidity in its stock. The price does not just fall, the number of shares in circulation increases too, by the factor of the split. This can cause not only greater accessibility to buyers as we have seen, but also it gives stock owners greater options to sell smaller holdings and these two factors can combine to generate greater market liquidity in the stock. Greater liquidity may have the effect of lowering the bid-ask spread that is quoted by market makers dealing in the stock on approved exchanges, which again makes trading in the stock easier and creates a better market for the company’s shares.
Can Traders Take Advantage of Stock Splits?
Academic studies undertaken since the 1990s have tended to indicate that stocks which have just been split tend to outperform the market as a whole for a while. Whilst this might seem too good to be true, a quick consideration of some of the likely reasons why this might be true show it is quite plausible:- Companies tend to split their shares when the price has become too “expensive”. Consider that for the price to have become too “expensive” it is very likely that the price has been rising for some time, and is also either at or very close to its all-time high price. This means that stocks that are split have probably been exhibiting excellent bullish momentum, which several academic studies have shown is a winning trading strategy if applied consistently.
- Companies are also more favorably inclined to split their shares when the Board of Directors believe that the share price is likely to keep rising and the company is likely to continue performing strongly in its market. This is not infallible, but such “insider” confidence can be a good indication of a company whose share price has a good prospect of rising in the near term.
- As described earlier, the action of a stock split usually has the effect of increasing liquidity and opening up more of the retail market. This can generate some bullish action as the split will attract retail buyers, driving the price up beyond the split factor’s division of the pre-split share price.
Of course, you could also draw another logical conclusion, which would be to short stocks which have just undergone reverse splits of their stock. Bear in mind that the optimal time period to hold stocks short tends to be less than when holding them long.
Unfortunately there are no ETFs offering recently split stocks, so you won’t be able to buy these stocks through most Forex brokers. Traders implementing this type of strategy would have to identify the stocks and buy them directly.
Source
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