Avoiding scams and CFDs

Why this lesson comes last

You can now analyse a stock, compute risk and keep a journal. But beginners usually lose money not to bad analysis but to the wrong product or to a scammer. Scammers target beginners precisely: they want fast results, don't know the terminology well yet, and tend to trust "someone experienced". Offers that arrive via Telegram, Instagram or "a friend of a friend" are especially common in Uzbekistan.

This lesson covers five dangers: CFDs and leverage, pump-and-dumps, Telegram "signal" schemes, fake brokers and guaranteed-return schemes. At the end: how to verify a broker, and a red-flag checklist.

A CFD is not a stock

In many apps you tap "Buy Apple", a chart appears and it says "position opened". From the outside it looks like buying a share. But very often you have bought a CFD (contract for difference), not a share: a contract between you and the broker on the price difference.

• You are not an owner of the company: no share changes hands, you are betting on price movement.
• Usually with leverage: a big position from a small deposit.
• Hold overnight and you pay a financing charge (a swap, in effect interest).
• The counterparty is often the broker itself: when you win, it may lose.

Leverage in numbers

Deposit $1,000, leverage 1:10: a $10,000 position. If price rises 5%, the profit is $500 (+50% on the deposit). Very tempting. But if price falls 5%, the loss is also $500: half the deposit.

The formula is simple: deposit loss = price move × leverage. With a real share, a 5% drop is a 5% loss and you can wait. At 1:10 it is 50%; at 1:20 it is the whole deposit.

On top of that, the broker forcibly closes your position when your equity falls to a certain level (a margin call and stop-out). Under European rules, for example, a retail account is closed out when it falls to 50% of the required margin. In our 1:10 example the required margin is $1,000; for equity to fall to $500, price only has to drop 5%, and the position is closed at the low. If price recovers afterwards, you don't. With a real share nobody forces you to sell.

In Europe, leverage on share CFDs for retail clients is capped at 1:5; many offshore "brokers" offer 1:20, 1:100 or more, which is itself a sign of how unregulated they are.

The cost of holding overnight

To hold a $10,000 CFD position overnight, the broker charges roughly 7% a year (an illustrative rate): about $58 a month, $700 a year. Since your deposit is $1,000, that is 70% of the deposit every year. In other words, price has to rise 7% in a year just for you to break even. Holding a real share for years carries no financing charge at all.

From a halal standpoint

Most scholars and Islamic finance bodies consider ordinary CFD trading impermissible:

1. No ownership. No real asset is sold, only a price difference (no qabd, taking possession).
2. Riba. Leverage is a loan from the broker; the overnight swap is its interest.
3. Gharar and maysir. The outcome resembles a bet on price rather than partnership in a business.

"Islamic" or swap-free accounts remove the overnight interest, but often add a fee under another name and don't solve the ownership problem; scholars disagree about them. Important: a stock passing the halal screen does not make its CFD halal. The screen judges the company, not the contract you sign. More: CFDs vs real stock.

How to recognise a CFD

• The words "CFD", "contract for difference", "leverage" or "margin" on the website or in the agreement.
• On European brokers, the warning "...% of retail investor accounts lose money when trading CFDs"; the stated share is usually a majority of retail clients.
• A dividend credited as a "dividend adjustment" means a CFD.
• Ask the broker directly: "Are the shares held in my name at a depository? Who is the custodian?"