All good comments but I think I might have misdirected or not explained the more significant issue that I see as a possible consequence to this event.
With “basic vanilla” buying and selling, you have the following possible extreme outcomes:
- infinite upside
- 100% downside
100% downside; This is a risk metric most people understand and are occasionally happy to take.
When it comes to more complex structured investment vehicles such as futures, options, you have the following possible extreme outcomes:
- infinite upside
- infinite downside (*depending on the LVR: Loan-to-Value-Ratio)
Infinite downside; This is a risk metric most people do not want to take. *And occasionally should not be allowed to take. (dependant on LVR)
As an example; before your approval for a mortgage on a house, your financial position and credit history will be scrutinized and screened by the lender. (I think LVR for UK home loans is 70% average? I could be wrong). So there is a regulator process to ensure safety, not only for the lender but also for the lendee. This regulator process was tightened after 2008 because of the irresponsible practises of some of the lenders. Obviously, with investments, the loan amounts could be much smaller, but the lending rates (LVR) are way more aggressive than home loans.
The biggest problem that has kept the lending rates and amounts intact is the fact that we are living in a world of 0% interest rates. The consequence of this is that financial institutions are more willing to lend money for these leverage, geared etc. products, as the delinquency rates are incredibly low. (We are at or very close to all-time highs: SPX). The addition of the extreme interest in online trading, recently, and incredible increase in volatility will unfortunately, exacerbate this issue.
However, we have not witnessed an “event” to curb or at least regulate lending from the financial institutions (in the 12 years I have worked in finance) when it comes to the infinite downside and the fact that the Federal Reserve announced 0% until 2022 two weeks ago, doesn’t deter the lendee and keeps them kicking the dept-can down the road.
I totally agree that education is a great tool and should be continuously improved and positively adds to the transparency we have seen within the financial industry in the last few years. However, I am in total alignment with the ideas of Freetrade on not allowing certain products on the platform to affect the future well-being of its users in a negative way.
All this really to say that I think Freetrade is in a great position, to reinforce this message.