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Unlimited Money Glitch?


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So we all know a sensibile investment strategy is to dollar cost average into an efficient market portfolio (like the S&P) over time and realise slow / lower risk steady gains over years.

However, what if we used this same strategy but in a spread bet / cfd account. Biweekly / monthly adding to a position at whatever price into the S&P 500 over time, would we make huge gains?

The logic being that (granted economic outlook is highly uncertain at the moment) in 33 of the last 40 years the S&P has increase yearly and averaged returns of 8%. These of course are modest gains usually but would be amplified using a spread bet or cfd platform.

I acknowledge I could be missing something obvious, but I'm pretty sure the S&P will reach 4000 this year, so why wouldn't adding a 1 lot position into the s&p (which usually goes up) every 2 weeks forever work?

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You would be paying a lot of fees in overnight fees. Plus, this is assuming the S&P will move in a straight upward line. However we do know markets hardly ever do that, so what is likely to happen is some major pullbacks along the way. Since your stop losses would have to be far below your entry points to accommodate these pullbacks, the margin requirement to keep the positions open is likely to be extremely high too. And all it takes is one major pullback to hit a lot of your stop losses, causing a large amount of losses in a short amount of time. I agree that in theory it could work but given current market instability the risk seems way too high for the reward. I might be missing something though.

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If you use the futures and not the DFBs, you have no overnight funding fees.  However futures get rolled at expiry, when you pay the spread.  The way I understand this is that for example for SPX it's 1 point - four times a year, or roughly 0.1% of your exposure in total, but please confirm with IG client services, there may be an additional spread (like they have when you let contracts expire - see https://www.ig.com/uk/help-and-support/spread-betting-and-cfds/fees-and-charges/what-are-igs-indices-spread-bet-product-details, note 4 ii).

 

If you're a retail client, you'll have to maintain 20% margin for indices, I think, even with a guaranteed stop.  keep that in mind.  so when it goes against you, even before the roll you'll have to put up capital for every dollar unrealized loss.

 

Regarding "amplifying" - guess you're referring to leverage, then of course the question is how much, and correspondingly how much the market needs to tank to wipe you out...

As unlikely as it may seem, but there is no certainty that SPX will not drop 100%...  but let's say you rule out anything worse than -50%, then ok, you would need only 70 for an exposure of 100...

...but would be broke and exposure-free with a drop of 50.01%...

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