As twitter gears up for its IPO we notice a spike in forex brokers offering promotions trying to get mileage out of the Twitter IPO’s buzz. While the marketing message looks nice a juicy on the surface, scratching the surface throws up an entirely different picture. One broker that caught our attention was Avafx/Avatrade who offers a free no deposit bonus for trading twitter CFD stocks. Here are 6 reasons I think of why you shouldn’t fall for this marketing trick, atleast when it comes to CFD stocks.
#1 Trading from IPO date makes sense if you actually own the shares
When a company goes public, they usually make use of an underwriter to facilitate the IPO flotation. These underwriters are institutions which are the biggest holders of the shares in the company. After which probably other minority shareholders include some other investment institutions. General public such as you and me can only buy shares ‘after’ the company’s stock is floated… and by that time the stock is very overvalued due to over subscribers.
When you buy a stock, you invest money in the shares in hopes that the company performs over time. During the course, you get paid dividends and the like, which form a small part of the income. Of course, if you buy just 1 share, chances are that you will get paid pittance.
So unless you have a huge bankroll, buying shares of a company right after they go public doesn’t make good investment sense.
#2 CFD Stock trading is different
Open a demo account with a broker that offers stock CFD’s and check out their swaps. In more than 98% the moment you ‘BUY’ a Stock CFD you are charged a commission (which is one time) + overnight swaps. The overnight swaps for regular buy trades are always negative. Conversely, you make more profits by short selling CFD stocks (because you borrow it from your broker, sell at a high price and buy and give it back to the broker at a lower price, when you close you short sell trade).
So, if twitter is supposed to float at $23 a share for example, then chances are that you are likely to get hit with negative swaps if you manage to buy and hold over months.
#3 You have no technical analysis to fall back on
For us retail traders trading with the regular set of brokers, we fall under short term traders. Ok, its considered short term even if you swing trade, when compared to real investors who BUY and HOLD over months/years.
With no technical analysis, you have no data. No moving averages, no pivot points. Does it really make sense to trade twitter’s IPO?
#4 Facebook’s Mistakes
Remember how Facebook’s stock plummeted right after it was floated? And it took almost a year for shares to push back higher. Now imaging if you bought Facebook shares at its IPO price.. to break even you would have had to hold on to your buy trade for close to a year. If the broker charged an overnight negative swap of -$0.08 for a 0.01 lot of BUY, then in a matter of just one month of 20/21 trading days you would be -$1.68 and commissions.
While brokers try to go overboard into pulling a fast one, traders should be careful of such marketing gimmicks that end up benefiting the broker rather than you. Remember, trading CFD stocks is very very different to trading the actual stocks. If you are really intent on owning some Twitter shares, you are better off contacting your high street bank than try to dabble with CFD stocks only to end up burning a big hole in your pocket. And finally here’s a good article on how an IPO is floated and the work that goes behind the scenes.
Play smart. Play safe