http://www.abc.net.au/news/stories/2010/07/12/2950822.htm

From the ABC:

The corporate watchdog is warning that tens of thousands of household investors stand to be financially devastated by investing in high-risk investments called contracts for difference (CFDs).

The Australian Securities and Investments Commission (ASIC) has sent undercover staff to education seminars marketing CFDs and found the seminars play down the risks of investing in the products.

ASIC says two reports it is releasing today are a warning to the CFDs industry: change your practices and lift your game or face tougher regulation.

The dangers in trading with CFDs was highlighted by the collapse of broker Sonray Capital in June.

There are at least 35,000 retail investors with $350 million invested in trading CFDs.

ASIC commissioner Greg Medcraft says the products are also being marketed on television as a way for ordinary people to make big money.

"The advertising is actually focused on prime time viewing to mass market audiences," he told ABC Radio's AM said.

"We don't consider these appropriate products for basically the mass market."

Mr Medcraft says trading in CFDs is riskier than going to the race course and should be left to sophisticated investors with deep pockets.

"When you go to the race course and you put a bet down - you actually can't lose more than you've actually put down," he said.

"[With CFDs], because you've got a leveraged bet, you can actually lose a multiple of what you've put down.

"Basically it means that within a very short period potentially ... you could lose everything you own."

ASIC has found many investors do not know how companies promoting CFDs operate.

The attraction and the risk in CFDs comes from what is known as leverage. They are essentially a bet on price movements in shares or commodities.

You only have to put up a small proportion of the position, as little 1 per cent.

Win the bet and you can make multiples of the money you put up.

But if the price moves against you, you can lose your money many times over and you can face margin calls that require you to immediately front up more cash.

Money you deposit with a CFD broker is also generally pooled so your funds can be used to cover losses and make up shortfalls in other accounts.

There is also the risk that if enough clients win their bets, the broker might not be able to pay.

"It... basically [has] the potential to break the bookie," Mr Medcraft said.

ASIC warning to investors