How I nearly lost all my funds – Lessons to be learned for new investors

How I nearly lost all my funds – Lessons to be learned for new investors

Imagine being in a world of free money.

Now imagine making a tonne of free money and then almost losing the lot.

That happened to me back in 2012.

When you hear the term ‘free money’ and how you can get it, your instinct [usually correctly] is to say it’s ‘too good to be true’.

Well back in 2012 the now bankrupt Worldspreads and their white labels were giving money out left right and centre in the way of bonuses up to £300 per account.

Trust me, I feel the same as you reading this, there is no way would they give you free money.

Well the thing is that they were in fact giving these bonuses in as a way to entice traders to trade with them. They treated this as a ‘loss leader’ and they would recoup the losses from the total losses lifespan of the account.

In 2021 in the gambling industry with many bookmakers still offering bonuses for the same reasons. It is possible to make a guaranteed profit on sports if you follow a series of rules.

This system is known as ‘matched betting’ is essentially a form of financial arbitrage but in sports betting.

This form of guaranteed profit was extremely popular in 2009 and usually attracted non-gamblers like myself to make a bit of extra cash on the side.

In fact it was an advantage if you knew nothing about sport [like me] as you would remain disciplined and not be influenced by bias.

The way it worked was that many bookmakers would offer a sign up bonus ranging from £5 up to £200 which they offered in the form of a free bet.

So to put it simply, in order to make a profit, you would bet on both sides of an outcome but by using the free bet as opposed to your own cash.

These bonuses were a great secondary income, and I got many years of holidays and weekend breaks from the bonuses.

The sports arbitrage is still possible today but the rewards are much lower than the 2010’s. I am not here to convince you to start the sports arbitrage as I think that the glory days are long gone.

I had originally learned about financial arbitrage after reading the book ‘Big Money, Little Effort’ by Mark Shipman which is a terrific read for anyone who hasn’t read it.

I picked it up after volunteering at a Model United Nations conference in Dublin. I liked the title and thought that if I buy the book in the hope that my investment of €15 would keep doublin’ and doublin’!

In there it described various forms of arbitrage and how they can guarantee a profit for a short period on stocks.

So after my success in sports, I realised that it was also possible to make a profit through arbitrage on speculating the markets due to bonuses being offered by online brokers.

So again, I was sceptical but as they were UK regulated FSCS brokers I thought that it was probably worth the gamble.

The reason it was worth a gamble was that FCA firms need to be covered by the FSCS which meant that at the time all investments were covered up to £50,000 [The compensation level has now increased to £85,000].

At the time, Worldspreads was huge and they had many affiliates and subsidiaries.  I noticed that they were offering up to GBP £300 / Euro €350 / USD $400 on losses incurred in the first month of trading.

It was impossible to find information online as to how to profit from this offer as you could not guarantee that you would choose the right direction of the stock market.

But I reasoned that if I opened several Worldspreads accounts across their various subsidiaries then I could make a guaranteed profit. The risk was also low as they were covered by the FSCS.

Initially I opened 2 accounts with Worldspreads and their affiliates and with one account I bought FTSE with a stop loss and stop gain of the equivalent of £300.

With the second account, I did the direct opposite and sold FTSE with a stop loss and stop gain of the equivalent of £300.

So after each account reached their respective loss and gain, one account had £300 profit and the other has £300 loss. I received £300 back from the Worldspreads offer which gave me an overall profit of £300!

Of course there was a small loss in the spread and trading fee but this was generally £2-3 across the 2 accounts.

So of course, I opened more and more accounts and continued to gain these £300 guaranteed profits. I worked out that it when I had 4 accounts open, I could trade 2 off against each other as above and I would have 2 accounts with +£300 and 2 accounts  of -£300 which would give me a profit of £600 after the 2 refunds.

I then traded the two accounts that were +£300 against each other which gave me yet another profit of £300. So I had 4 accounts with an overall profit of +£900.

Overall I invested £4000 which gave me a profit of £900 in one month. This gave me a yield of 22.5% for the month or 270% for the year with little or zero risk. Not bad!

In the end I had gained around £9,000 in three months utilising the same strategy across Worldspreads, its affiliates and other companies offering similar bonus schemes.

But the initial deposit was fairly high in order to cover the trading margin of each platform. So at the time of Worldspreads’ failure I had approximately £1000 in each account, covering 4 accounts at the time.

Then everything went wrong and Worldspreads went into liquidation! I thought oh no, it was too good to be true!

However, I didn’t panic (too much!) because I knew that Worldspreads was covered by the FCA’s FSCS compensation scheme.

I have a background in UK law so I was able to contact all the relevant parties (e.g. official receivers) in order to get all my deposits back. I also contacted people on the forums to help them get ther deposits back too.

The whole process took around 3 months but it was an amazing feeling to know that I had managed to take advantage of the sign up offers, had my holidays and also managed to retrieve my money after the firm went into liquidation.

Of course I then booked a holiday to celebrate my ‘win’!

Now I am super cautious as to where I invest my money. The deal that I had was almost ‘too good to be true’ but I was lucky that I had done my due diligence before depositing with Worldspreads.

Luckily for me too that they only had one regulator. If they were regulated offshore I would have lost the lot.

I wouldn’t touch a firm that wasn’t covered by the FCA (UK), FINMA (Switzerland) or FINRA (USA) as they have funds protection of £85,000, 100.000 CHF and $250,000 respectively.

Most European Union brokers have coverage of 90% up to €20,000 which are also worth considering but some don’t have the same strict regulatory oversight that the The FCA, FINMA and FINRA do.

So if the regulation of your current broker does not have a compensation scheme then you should consider changing broker. Otherwise you may not be as fortunate as I was!