Why (not) invest in company debuts with Forex brokers?

This article was inspired by the disturbing events that have been taking place on the Polish Forex market for about a year. On the Internet, on discussion forums and social networking sites, you can find statements of people who, at the instigation of brokers, lost a lot of money deposited with Forex brokers due to unsuccessful investments. And these were supposed to bring some profit. To invest or not to invest in company debuts with Forex brokers?

The scale of the phenomenon is starting to be terrifying. Currently, we are dealing with a real scourge of brokerage companies that offer debuts for the purchase of "shares" of listed companies (why in quotation marks about it later). Some of you may have received a call from a tele-seller representing an international investment house with a "great" offer - it is them. Have you never registered there? It doesn't matter. Someone has sold your data.

Due to the fact that I own dozens of real bills with brokers from all over the world, I often receive such calls but at the same time it is impossible to determine where personal data go from. At least for now seven companies conducts intense telephone sales among Polish clients by offering them debuts.

How it's working

The sales mechanism is very simple. The seller receives access to a database with clients, whose task is to call and persuade super-hyper-extra an investment opportunity which is the purchase of XYZ shares, which are just going public. For a successful transaction, he receives a bonus remuneration, which usually depends on the amount of the deposit. Surprisingly, such a seller very often has no idea about trading on the stock exchange or has the necessary minimum knowledge to attract a client. If we ask where he has our phone number from, we will usually meet with an answer "from the secretary" or another, not very ambitious lie. If we show too much knowledge of the market, the conversation will also probably end relatively quickly.

READ NECESSARY: TOP 5 - The most popular scams under the FOREX market

Companies that offer this type of debuts are usually Market Maker brokers. This means that they become a party to the transaction. With the current scheme of operation, it is even certain that they do not secure these transactions further on the market in any way. Thanks to this, the broker not only earns on commission or spread, but takes over our entire deposit if the account is cleared. And in the end, that's more or less the goal.

Why can you not make money from it?

In fact, you can actually make money on it, but the chances are relatively small and it is certainly not as simple as our "account manager" presents - although a more appropriate term would be "account destructor". First things first…

In the case of IPOs on the regulated market, i.e. IPO (Initial Public Offering) before the shares enter the stock exchange and are traded, brokerage houses accept subscriptions for shares, and we only know the initial valuation of shares, i.e. the price at which the subscriptions are made. If the issue is for 100 shares, where one is valued at PLN 10, this means that the total value of the issue is PLN 1. If, for example, two investors apply for such an issue, both of whom want to invest PLN 000 each, the so-called reduction. This means that both of them will receive 1 shares with an initial value of PLN 000, and the price itself will jump up at the opening of the session due to the greater interest of investors than the number of shares.

If the reverse situation occurred, where the value of subscriptions would be lower than the value of the issue, then the rate at the opening would drop. Of course, this example is a big simplification, which only has to show clearly what the mechanism looks like. In practice, there are more investors engaging different value of funds, however, then everything is calculated proportionally.

But is it always?

Meanwhile, on Forex platforms we are dealing with contracts for differences, or CFDs. These are derivatives, the price of which is based on the underlying instrument, and this can be any. In case of CFD per share the stocks from the regulated market will be the underlying instrument. By buying CFDs on the FX platform we are not holders of shares (shareholders) of a given company. We have an instrument in our portfolio, the price of which depends on share prices.

READ ALSO: How to recover funds from a dishonest Forex broker [Guide]

A Forex broker that offers us an investment in "debut", in fact, proposes to us to open a leveraged CFD position on the shares of a given company after FIRST market price. This means that if the opening price jumps up by 50%, i.e. from PLN 10 to PLN 15, our position will be opened at PLN 15, not PLN 10. This means that we actually acquired the CFD at the opening, i.e. a moment later after what gives the highest profit on stock market debuts. The upside is that there will be no reduction here, because we are in fact concluding a contract with a broker (we assume that the price will increase) so it does not matter how many shares are in circulation. Additionally, the trade is usually leveraged 1:20 or even 1:50 so we have "shares" worth more than our funds in the account.

Of course, the sellers will not tell us. Just like the fact that we do not know at what rate we will buy CFD on the day of the debut. By contrast, using examples on sale will make us debut with historical debuts Having increase in the price of shares before the possibility of purchasing CFD.

How much can you lose?

Well, everything depends on what will happen to the share price of the company after opening. If the increases are continued, there is a chance that we will make a profit, but if after spectacular increases resulting from large subscriptions for shares, investors from the regulated market will start making profits, we will clean up our bill very quickly considering the leverage. Summing up, we are in a very unfavorable situation, because we do not have any security, we use a lever, we do not have access to any listing history of a given company, and we can not earn the increase in the rate resulting from the opening of the session.

For example, to demonstrate the potential of "profit" we will use the debut of Facebook on the stock exchange NASDAQ in May 2012. Just before the IPO, the stock was trading in a range of $ 28-35. On May 18, when Facebook officially started its adventure on the stock exchange, the value of subscriptions exceeded the value of the issue by 25%. As a result, despite earlier valuations, the opening rate was USD 38,20. Despite the 1/4 reduction in terms of subscriptions, there was a chance for earning here. However, in the context of an "IPO CFD", we would become equity holders with an opening price of $ 38,20. Therefore, it is worth seeing what happened next.

Let's see it in this example

The share price began to fall and during the next three weeks of trading with 38,20 USD sagged to 27,00 USD, which was a drop by approx. -28%. It can be said that this is not a tragedy, the more so that now, or even four years later, Facebook shares are worth after 113 USD each. The problem is that you would have to survive to this moment. Trading in CFDs uses leverage. This means that if we have purchased a given value for the whole of the funds from the account (to which the vendors urge us) with only 1 left: 20 is instead of a loss -28% we would 20-a bigger minus, that is, some -560% ! Of course, due to the Stop-Out mechanism, we would ultimately lose "only" 100%. Such a development of events would make one side surely happy. Of course, we are talking about the broker who has just taken over our deposit in full.

How to fight it

The most effective solution would be assertiveness or changing the phone number, but most of us, for obvious reasons, will not suit it. You can just hang up and block the number from which we were called (most modern smartphones have this feature as standard). The problem, however, is that teleshoppers may have access to new numbers every day.

First of all, let's be vigilant. If someone promises us a great investment opportunity on which you cannot lose, and in the background you can hear the rumor like from the "Wolf of Wall Street", then a warning lamp should light up. The stock market is always associated with risk, and a stranger who offers us money "for free" certainly does not act selflessly. If we decide to invest in debuts, let's do it fully consciously and with a calculated risk and an idea for something more than opening a position.

The most common lies

It is worth paying attention to the most common tricks and abuses that are perpetrated by tele-sellers - "Forex Wolves". Here are a few of them:

1. "I have a great investment opportunity for you, on which you can only profit" - a determined leader. The stock market and guaranteed profit are like pre-election promises. They have no cover. After such a password, hang up immediately.
2. “The last debut provided 100% profit in XNUMX hours, now it will be the same. How do you like it? " - if we talk to the soothsayer Maciej, you can still believe it, but otherwise let's not delude ourselves that the consultant knows the future ...
3. "I have your secretary's number" - really? So let's ask her to the phone and ask where she got it from. There will probably be a problem with the connection and the consultant will hang up.
4. "I'm calling you from an international investment house" - ask, then, what country the company is from, what address it has and whether it has the appropriate licenses. I advise you not to take my word for it - check these data not only on the broker's website but also on the official website of the regulator. It may turn out that the British company only has a post office box on an exotic island (which belongs to the UK), and the regulator has published a public warning about it long ago.
5. "I cannot give you the license number, because it is secret information" - complete rubbish. This data is generally available, and the broker usually even wants to show it off, because it increases its credibility. In case of providing the number - always check it on the regulator's website.
6. "I promised to call you when a new investment opportunity appeared" - if we actually asked for it, it's okay, but usually we hear this text from a person with whom we talk for the first time in our life or we have just been diagnosed with advanced Alzheimer's.

Good luck!