Trading Singapore CFD or Contracts For Difference allows you to either long or short underlying instruments (Stocks, ST Index, etc) with a small initial capital.
Personally, I prefer to use CFD for short selling. It’s more convenient as compared to other facilities like share borrowing.
You just sell as per a normal sale transaction in a stock.
Some investors also use CFD for their long positions, which is similar to a margin account.
Using a Singapore CFD account for long positions might be worthwhile if the financing rate for CFD long positions are lower than a margin account.
Ocassionally, I have used CFD to hedge my stock while waiting for new shares (bonus issues, distributed shares) to be issued.
Alternatively, you can use CFD to hedge your portfolio if you feel that that market is poised to go lower.
Hedging has the aim of reducing risk on your portfolio, without reducing exposure to your stocks.
How Singapore CFD works
Your CFD is provided by a market maker, who is usually the company offering you the CFD trading account.
The market maker’s job is to ensure liquidity for the instruments that are quoted.
Depending on its business model, when you long a stock CFD, the market maker may short the underlying stock in the cash market.
This neutral position allows the provider to earn some fees with minimal risks.
Alternatively, the market maker may choose not to sell the underlying if it decides to take a position against you. (Don’t worry, it’s not personal. It’s just business.)
In Singapore, most CFD providers use the Direct Market Access (DMA) approach to determine the CFD prices. In other words, the price of a stock CFD follows the stock price in the cash market exactly.
Cost of trading CFDs in Singapore
Base on the marked-to-market value of your contract, you will be charged a commission for each transaction financing charges ranging from 4% to 8% per annum for as long as your positions are open. A GST of 7% will also be levied on the commissions.
Some risks of CFD trading
When you buy a stock CFD, you don’t actually own the underlying stock. It is a derivative, so it derives its price from the underlying stock. You are still entitled to the dividends but only via a dividend adjustment and you have no voting rights whatsoever.
CFDs are not traded on a recognized exchange so you can’t buy them from one provider and sell to another because the latter is offering a better price. CFD is a leverage product And like all leverage products, it is possible to lose more than the initial amount that you put in if the stock price moves against you.
How to open a CFD account
The CFD trading account is usually a tag-on account to your brokerage account. If you already have a brokerage account with a firm that also provides CFD trading, opening the CFD account is as easy as filling in some paperwork. After that, you’ll need to deposit some funds into your CFD account before you can start trading.