CFDs are leveraged financial derivatives that can yield high returns, but of course, this comes with higher risk. Usually traded on margin means that your losses can exceed your initial investment! It is estimated that 74-89% of retail investors lose money when trading CFDs and other leveraged instruments such as forex.
The risk is so high that the European Securities and Markets Authority (ESMA) has made it mandatory for CFD brokers to give a risk warning on their web pages, stating the percentage of retail investors who lose money when trading CFDs with them.
A Contract for Difference (CFD) is an arrangement between a buyer and a seller where the payout is dependent on the difference between the opening and closing times of a contract (typically within a day, as a holding cost may be charged by your broker if it is held after market closing hours). The buyer will earn when the closing market prices are higher, i.e. the price has increased. On the other hand, the seller will earn when the closing market prices are lower, i.e. the price has decreased
Jack buys a CFD from a broker, in which the underlying asset is 100 shares of CapitaLand Investment. The current price of a CapitaLand share is $4, so Jack will pay $400 (assuming no margin or other charged fees). Say this rises to $5 at the end of the day. In this case, as the closing market price is higher, the buyer will receive a payout equaling the difference from the seller. Hence, Jack will receive ($5-$4) x 100 = $100 from the broker.
Same as above, except instead of rising to $5, the price falls to $2.50 at the end of the day. As the closing market price is lower, the buyer will have to pay the difference to the seller. So, this time, Jack has to pay $1.50 x 100 = $150 to the broker.
CFDs for foreign exchanges are likely the most popular of the bunch. In foreign exchange CFDs, you are looking at the rise or fall in the exchange rate between a pair of currencies, such as the US Dollar and Japanese Yen pair. CFDs come in many forms, so it’s best to do your due diligence before jumping into trading them.
Long Position: you act as the buyer. Take this position if you expect the underlying asset’s price to rise.
Short Position: you act as the seller. Take this position if you expect the underlying asset’s price to fall.
While CFDs are banned in the US, the MAS allows CFDs to be traded in Singapore, as long as there is a fact sheet of risks that goes alongside it. However, only selected brokers registered with the MAS are allowed to broker CFD trades.
Here is a non-exhaustive list of CFD brokers in Singapore:
Before you’re allowed to trade CFDs in Singapore, you must pass a Customer Knowledge Assessment (CKA). As part of MAS regulation, you will have to complete the CKA before opening an account with a broker. The brokers themselves will typically give this assessment. However, perform your self-assessment to ensure that you’re ready to tackle CFDs in the market!
CFDs INTRO. COMPLETED. ✅
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