Editor’s note: This article was first published in June 2014; its description of opening a CFD account from €300 and facing margin calls reflects 2014. Since 2018, EU rules have capped retail CFD leverage and required negative balance protection, and the Spanish retail warrant market has shrunk.
Although we will write a more detailed article on the investment and speculation options open to you when you only have €1,000, I’d like to take this opportunity to answer a reader who asked about the best way to speculate with that money.
As someone once said: “If you have a lot of money, you should look for a diversified, low-risk investment with a modest return. If you have a fair amount of money, you should look for a fair average return. If, on the other hand, you hardly have any money, you have no choice but to speculate.”
You can get a lot out of €1,000 by speculating, just as it can disappear very quickly if you make a couple of mistakes while leveraged. Here are some of the options available, along with what are, in my view, the best ways to speculate.
First, once we have decided to speculate rather than invest for the long term, we will need to use leveraged investment products. The mere mention of leverage already implies high risk. Add the word trading and, if you have no experience at all, there is a good chance that instead of multiplying your money you will end up losing it.
Those who know me already know that I am against intraday trading, although I am a great fan of trend trading.
1. A CFD account
Most people turn to opening an account to trade CFDs, as there are plenty of brokers where you can open an account with €300 or even less. But don’t forget that if you have a losing position, the broker may require you to put up more collateral to back the trade.
With CFDs you can invest in a wider variety of products: currencies, indices, shares, commodities, gold and so on. For someone without much experience, indices would certainly be the more advisable choice, provided we have spotted a trend.
To explain the risk of CFDs, I always give the same example: “CFDs, like most derivatives, are zero-sum games in which one person wins because another loses, and in intraday trading 90% of traders lose money.”
2. Open a share-dealing account at your bank and invest on credit
We come back to the same point: as a rule, most banks grant intraday credit to their share-dealing customers, with leverage of around 20%. In other words, you can invest €5,000 with the €1,000 you have. If you buy a share in the morning and it rises 2%, you will have made €100 (minus commission). If you had €2,000, you could invest €10,000.
That credit is useful if we are expecting a sharp move on that particular day and want to get the most out of what little money we have.
Bear in mind that if there is good news about a company and its shares shoot up 10%, you can make €500 with that €1,000. But, I insist, you can also lose it. It is nothing new to say that in any trade you have to set a stop-loss and stick to it. Even so, I wouldn’t recommend that someone without experience use that credit unless they are very sure of what they are doing.
3. And my favourite… warrants
For riding a trend, and even though I have sometimes witnessed price manipulation in this product, the truth is that in the end it pays off. There would be a lot to say about warrants, as they are supposedly one of the most complex investment products, although in practice they really aren’t that complicated.
We are not going to give a course on warrants now, but they are one of those products I always recommend studying. What’s more, if you understand warrants, you understand options trading, and vice versa. They are very similar.
Unlike the other two ways of speculating, with warrants we can choose different levels of risk on the same underlying asset, as well as different time horizons. A warrant is a dangerous product not only because of the leverage but also because it expires, and as the expiry date approaches its value keeps falling, even if the underlying asset rises moderately.
But for strong moves, or trend trading over weeks or months, it is undoubtedly the best option. Personally, warrants have brought me a lot of joy, including some trades with gains of as much as 80% in seven days. Of course, I have also had my blunders, such as being long on the Nikkei and taking a leveraged 3% fall, which meant a loss of about 35% in a single night without being able to do anything about it, because during the hours the Nikkei is open I couldn’t trade warrants.
Even so, my overall return on this product is quite positive.
These would be three of the simplest ways to speculate with little money, although, I repeat, the risk is quite high.
In another article we will talk about what I personally recommend in cases like this, where we have neither money nor experience.
Further reading
- Products to invest in when the stock market falls (going short)
- The best investment advice an investor can get
- The most profitable and safest investment is paying off your debts
Featured image: Dick Thomas Johnson, CC BY 2.0, via Flickr.
