What is Contracts of Difference (CFD) trading?
According to the website of CMC markets (http://www.cmcmarkets.com.sg), Contracts for Difference (CFD) is a type of derivative product available to investors who are seeking to hedge and/or speculate financial instruments at low costs, without having to putting up the full value of the contract. One will essentially be using margin, or paying a certain percentage of the amount, and enjoy the benefits of owning the underlying, in this case, the CFD contract, at a lower rate, rather than to pay for the full amount at the exchange.
How does CFD works? (Source: CMC Markets, Singapore)
CFDs are a type of over-the-counter (OTC) contracts between the investor and the provider to pay the difference between the price the investor pays to enter and the price the same investor exits from the same underlying asset at a later date. The contract is then settled in cash at the close of the trade. The price quote is derived from an underlying asset (Derivative product) such as currencies, commodities, indices, or shares. The quotes derived from the platform provided are real-time and are mark-to-market. The prices moved in rapid fashion, and it indicates the amount of trades, and volume being placed. Unlike traditional share dealing, with CFDs, investors do not actually own the physical shares, but instead profit on the bid/ask spreads quoted. There are profit opportunities, and at the same time the downside is unlimited if one were to place several trades on huge margin, and the possibility of getting a margin call from the provider if the investor does not put up more margin for the particular trades involved.
What are the risks involved in trading CFDs?
CFDs must be traded with full caution and awareness, as the product might not be comfortable for some who are risk adverse, and are not prepared to ‘stomach’ the volatility. One shouldn’t open a CFD contract trading account without knowing the full risks involved, and each individual’s risk tolerances. The contract trades in over-the-counter (OTC) are out of official oversight from the regulators, particularly with the Monetary Authority of Singapore (MAS). Potential investors should carefully trade the potential risks and rewards that comes along with trading of CFDs. The use of leverage in CFDs magnifies both the downside and upside, however if one were to caught at a downside at a too rapid pace, the amount of loss could be hefty to the point of losing the initial margin (deposit) placed, or even false withdrawals demanded by lenders.
Who are the main providers of CFDs in Singapore?
IG Markets Singapore (http://www.igmarkets.com.sg), according to securities filings, is one of the largest retail CFD provider by revenue (excluding foreign exchange (FX)), and is said to be the number one CFD provider for customer satisfaction in Singapore. The Company is a proud winner of two awards, namely winning recipients of overall client satisfaction, and mobile phone platform by industry publication, “Investment Trends” in 2012. IG Markets offers various product/service features that have contracts traded in over thousands of investable markets, including forex, stock indices, commodities, shares, binary options, etc. The Company offers low trading/commission costs, tight bid/ask spreads, and is considered one of the largest CFD providers in Singapore.
Saxo Markets Singapore (http://sg.saxomarkets.com), is a prominent provider of CFDs in Singapore, along with its other product platforms. One of the service features offered by Saxo Markets Singapore includes live streaming prices and removal of delays associated with filling limit orders placed on regular stock exchange trading. Some of the features offered by Saxo Singapore include accessing to over 8,600 CFDs, including 22 Index-Tracking CFDs, 20 Commodity CFDs and Forex CFDs; no settlement or custody costs, flexible trading, leveraging opportunities, using stock or bond portfolio as collateral for CFD margin trading, etc.
Several Singapore Exchange Limited (SGX) clearing members (aka stock brokerages registered with the bourse, and thus subjected to regulatory scrutiny) such as CIMB Singapore, Philip Capital, MayBank Kim Eng, etc. provide CFD products/services. However, as clearing members with the SGX, they are also subjected to the regulations governing their overall business activities by the Monetary Authority of Singapore (MAS). Starting from January 01, 2013, all investors who are interested in investing in Structured Investment Products (SIPs) must undergo a full review by their respective brokers over suitability, and adequate market knowledge of the product/services offered, such as warrants, certain type of ETFs, CFDs (if traded with one of the clearing members). Although CFDs are widely available and easy to trade with among retail investors, I believe that they do need to be vigilant, and understand the product/services offered before jumping into the bandwagon.
Full Disclosure: I am a current CFD account holder with CMC Markets, Singapore.