CFD Education Series – Part 1

Top Traders use CFDs to trade more for less

SGX_Article_1_more_for_less

What is CFD trading and how do you trade such instruments?

A Contract for Difference (CFD) is an agreement to open a contract for the difference in price of an asset from the time the contract is opened until the time at which it is closed.

With CFDs you can take a position on the future value of an asset whether you think it will go up or down. For example, if you believe an asset’s price is going to rise, you open a buy position (known as ‘going long’). If you think the asset’s price is going to fall, you open a sell position (known as ‘going short’).

It is important to remember you’re trading contracts, not physically trading in the underlying market. This means you don’t actually own any assets.

What markets can I trade?

With CFDs you can trade on a range of markets, including local and global stocks, indices, forex and commodities. This allows traders to diversify their portfolios and take advantage of different market cycles.

Why are CFDs getting increasingly popular with retail investors?

The main reasons for their increasing popularity include:

    •   Leverage
    •   Lower transaction costs and lot sizes
    •   Flexibility; ability to profit from both rising and falling markets

Unlike traditional shares, CFDs allow traders to enter a position on a contract using just a fraction of its actual value. This means you only have to put down a small deposit (from 10%) for a much larger market exposure.

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The cost of trading is also significantly cheaper, from 0.1% on Singapore share CFDs with a minimum charge of $15.

Traders are also not confined to lot sizes typically seen in physical shares or spot forex trading. The flexibility to choose the size of your trades gives you more control over portfolio allocation and use of capital.

Example:

Stock: DBS Group Holdings Ltd

Buying Shares Outright 

Buying CFDs

Buy Price1

$19.95 $19.95
Order Size 1,000 1,000
Margin Required %2 100% 10%
Initial Deposit / Margin $19,995 $1,999.5
Notional Value $19,995 $19,995
Days Position Held 5 5
Price Appreciation % 5% 5%
Sell Price $20.94 $20.94
Gross Profit3 $990 $990
Daily Funding %4 0% 2.85%
Commission – Open5 $55.98 $19.99
Funding - 5 days $ -   $7.80
Commission - Close $58.63 $20.94
Net Profit $875.39 $941.27

 

Notes:

1 Example price which is subject to fluctuate

2 With CFDs the margin requirement is 10% on Singapore stocks

3 ($20.94 - $19.95) x Order Size

4 CFDs charge SIBOR +/- 2.5% daily.

5 Other online brokers’ minimum online commission is $25 or 0.28%. IG charges min $15 or 0.1%

6 Net profit/initial deposit

 

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