Are OTC Derivatives Recommended For Beginners?

It would be easy enough to rattle off a series of warnings about the dangers of over the counter (OTC) derivatives, given that these are well-known and a favourite topic of regulators around the globe. I would prefer to mention some of the clear advantages of these products for beginners, when compared to the exchange-traded derivatives market. These include:

1. Size – not many beginners can afford to trade full contracts on the derivatives exchanges, or to cough up the sizeable margin requirements for playing in what is essentially an inter-professional market place.  CFDs and Spread Bets can give exposure to the same underlying asset classes with much lower entry requirements.

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2. Complexity – While the professional market can be daunting to research and understand, it is in the interests of the retail derivatives firms to make their websites and trading platforms as accessible as possible.  Most offer demo accounts to allow beginners to try out the trading platforms before risking any real money, and many provide excellent educational materials such as webinars and live seminars at zero cost.

3. Protection – the inter-professional market is not a forgiving environment and it is all too easy to wipe out your trading account and run up additional liabilities with ill-judged trades.  Very few CFD providers now offer credit, so the limit of your exposure to a retail broker is generally the amount to which you decide to fund your account.  While your gains and losses may be magnified by leverage, you will often find that positions which go in the wrong direction get closed out automatically, simply in order to protect the firm from bearing the loss on your losing trades.  Retail firms in many countries also have to maintain client assets in separate accounts and pay into a client protection fund to protect customers in the event that the firm itself goes bankrupt.

4. Variety – while individual exchanges tend to focus on specific asset classes, the retail derivatives firms can give clients a taster of everything, from global equities to energy derivatives and from interest rate differentials to orange juice.  Similarly the way in which you can back your market view is much more varied, with traditional CFDs, Spread Bets, regular options and binary options often available on the same underlying product.   Experimenting with these various products is a great way for getting a sense of how various markets operate and deciding which best suits your trading style.