THE PERILS OF CREDIT

THE PERILS OF CREDIT

 The collapse of MF Global raises one or two interesting issues.

 First, I should declare MF Global owes me £45,000. I had £65,000 in spread bets with them and managed to get 20k off them just before they went bust.

 I had a letter today from the administrators...

 The upshot is they are trying to sort out the mess and I'd expect to hear from them "in due course".

 I expect to get the money back but it would be no surprise if I had to wait for a while.

 The money was supposed to be held in a segregated account but, of course, we know over in the USA some of it wasn't.

 No-one appears to know whether the UK accounts were segregated, but I did speak to someone at MF before the administrators moved in and he said they definitely were.

 However, despite the doubts I should get it all back as it's under the £85,000 guaranteed to be returned under the current financial rules.

 However, what if I had had £300,000 with MF Global? I think I would be rather worried.

 There are two major issues raised by the collapse:

 1 - Beware of having too much with one provider

 2 - Beware of overleveraging

 So, number one; it is best not to have more than £85,000 with any one spread bet, CFD, broker or institution. Even though most of them are unlikely to go bust in this climate, who knows what’ll happen?

 For example, if you are spread betting with £300,000 spread your money across four separate accounts or more - at least then you know you should get your money returned if the worst happened.

 The other perhaps is even more important; overuse of leverage or credit provided by spread bet and CFD accounts.

 It is a reminder that at any time your provider can simply email you and say: "Sorry we are offering no more leverage/credit, please mail us cash right now or we will close out your positions."

 Leverage simply means credit. Say you have 10 grand deposited with a spread bet firm, in a lot of cases they might give you access to 50-100 grand worth of shares.

 What happens is people get greedy and start using the credit. They suddenly have 90 grand’s worth of shares and, for example, only 15k in the bank to cover it.

 What happens if the market melts down or the firm tells you “no more credit”? You only have 15k to cover 90 grand.

 I have heard from and met people over the years who lost everything they had doing this. Do not be a casualty of leverage because you got greedy.

 So repeat after me “only play with money you can afford to lose and do not ever use more leverage than you can handle”, especially with spread bet firms or anything that gives you leverage!

 I personally could right now go in and buy 3 million quids worth of shares on leverage. Am I tempted? Not in the slightest.

 It's greed that tends to be the downfall of many trader spurred on by overuse of leverage.

 Think hard: can you really afford all those positions you have open on credit? Could you pay up right away if all your bets were closed out and you owed them?

 If you want to read what can happen to real people when this happens then read the traders tales chapter in my new book Naked Trader 3, available on this link from the ADVFN bookstore: http://books.global-investor.com/pages/home.htm

 The worst I can remember is someone who nearly lost everything when he went crazy and leveraged up continually on just one share that kept going down.

 He nearly lost his house and his marriage. Read through the stories and then take a good honest look at your positions. Should you really have them? Can you afford them?

 Well, okay write me off as a boring old fart if you will, but you know I'm right!

 PS. If you had any money with MF Global, ensure you make the administrators aware - the email address is

 mfglobalenquiries@kpmg.co.uk