This is second instalment of Timizzer.com’s ongoing investor education series discussing about some of the latest investment/product offerings for investors. In the first part of my article on this subject, I have illustrated some of the benefits and some of the biggest providers of contracts-for-differences (CFD) products. In this instalment, I shall discuss in detail some of the spreads, trading costs, liquidity as measured by the bid-ask spreads , etc. I will also discuss shortly some of the risks and benefits involved in one were to start trading CFDs, and precautionary measures to take to avoid margin calls.
|Trading Contracts for Difference (CFD) products||Trading SGX-listed stocks|
|Ability to short the stock/market||Able to make short trades with relative ease, speed, etc. No need to close out position by end of trading day; Need to put up margin, but at relatively small amounts.||Delays might be expected. Need to close out position by end of trading day.|
|Commission costs||Tight spreads from 0.4 pts to 0.7 pts; Low commissions overall as per info from CMC Markets.||For example, UOB Kay Hian’s UTrade Edge Account (most basic), online rates starting from 1.8 pts; Minimum commission between SGD 18.00 to SGD 40.00 per trade.|
|Position limits||Starting from 5 units in the case of CMC markets||Start from 1,000 shares for one lot; Gradual transitioning to 100 shares for one lot starting in 2014.|
|Variety of tradable instruments||CFDs, commodities, indices, stocks, options, bonds, futures, etc.; Greater universe and flexibility to trade||Stocks, REITs, warrants, ETFs, etc.|
|Fill rate for trades||Relatively fast by the milliseconds depending on size of trade, volume, bid-ask spreads, limit order values, etc.||Takes some time, sometimes to the last hour of trading depending on trading volume, market cap of the stock, etc.|
|Types of orders||Greater variety in types of orders, eg., Limit orders; market orders, stop orders, etc.||Limited variety of types of orders, eg. Limit orders, market orders.|
|Variety of charting tools||Variety of charting tools; some developed in-house||Charting tools function are slightly limited; and/or provided by outside vendors which does not provide sophisticated tools for analysis purposes by active investors.|
Source: CMC Markets (Singapore) and UOB Kay Hian (Singapore)
Risks involved while trading CFDs
It is highly recommended that beginner investors should consider the suitability and risk tolerance when trading with CFDs due to its mark-to-market features, amount of margin placed into the trades, behaviour characteristics such as risk tolerance, ability to withstand volatility, etc. There are many education seminars organised by the major CFD providers which are geared towards investor awareness, education, and tips on how to effectively use CFDs to hedge and/or speculate. However, one must be conscious about the risks involved, and not to be over confident, as the downside is often unlimited, if there are no stop orders being placed. Risk management is one the key measures one has to be mindful before investing in CFDs. Knowledge of the product is also critical.
Benefits involved while trading CFDs
One can enter and exit the markets with relative ease, and anonymity of trades being placed out if one is sensitive over this factor. Mark-to-market features are an attractive option available to active investors who wants to trade based on spreads. It is also a relative low cost mode of trading given the low commission charges being levied, and size from the trade can be divided into small quantities, as opposed to the mandated 1 lot = 1,000 or 100 shares. There is also the flexibility to trade while on commute.
Precautionary measures when trading with CFDs
One needs to make the conscious efforts to monitor amount of margin limits, and to address any margin calls as closely as possible due to margin limits imposed by CFD providers.
In conclusion, CFD trading provides tremendous flexibility, and variety of choice among providers. However, investors should pay attention of the risks involved, and one of the good ways to learn CFD trading will be to attend some of the education seminars that most CFD providers offer so as to obtain some knowledge and awareness of the tools, functions, risks and benefits involved while trading CFDs. One needs to shop around to find out about the range of products/services, costs etc. offered by the local CFD providers in Singapore or in your local region, and never stop learning.
Full Disclosure: I currently hold a CFD trading account with CMC Markets (Singapore).