Investors were left nursing significant losses yesterday when margin calls were made on hundreds of leveraged positions in Irish stocks as the market took its latest tumble.
Dealers reported an "incredibly nervous" trading session as the Irish Stock Exchange spent the entire day in negative territory. As much as €3 billion was wiped off the value of Irish shares on the day. Financial stocks again bore the brunt as Merrill Lynch cut its earnings estimates for the three major financials by as much as 7 per cent, citing the risk of a sharper than expected slowdown in construction.
The early turmoil, which saw leading stocks such as Ryanair and Anglo Irish Bank shed close to 6 per cent of their value, saw brokers make a further series of margin calls on contracts for difference (CFDs). CFDs in AIB and CRH were also affected.
CFDs allow investors to take a position on the future direction of a share price without owning the underlying stock. In general, the investors deposit a "margin" of around 20 per cent of the value of their position with a broker.
However, if the share price moves in the wrong direction, brokers will require the deposit of further margin to cover the position. If not forthcoming, the position is closed leaving the investor liable to potentially significant losses. The 28.4 per cent fall in the Iseq since its peak in February has seen CFD holders facing a series of margin calls in recent months. Irish investors were particularly exposed following a rapid increase in exposure to CFDs in recent years as the Irish equity market regularly outperformed its peers.
New rules come into force this month to ensure that investors dabbling in derivative products such as CFDs understand the risks involved and have the financial muscle to meet any losses. However, yesterday's margin calls involved CFD investments made under the more liberal existing arrangements that have seen some brokers aggressively selling CFDs.
Stock market sentiment was negative across Europe yesterday, but the Republic again outperformed on the downside, with the Iseq index falling 3 per cent, to end its lowest closing price since July 18th, 2006.
Financial stocks have lost more than a third of their value so far this year - and are now more than 40 per shy of the peak they hit last February. As usual the banks were the main contributors to the declines, with one dealer saying that international investors simply had no desire to put their money into anything vaguely on the periphery - and that's just where Ireland is considered to be. "It's seen as okay to lose money on Citigroup, but not on the likes of Anglo," he said.
