CMC Markets Singapore Understanding CFDs

8/13/2019 CMC Markets Singapore Understanding CFDs

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Understanding CFDs

THE CMC MARKETS TRADING SMART SERIES


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CMC Markets | Understanding CFDs 2

CFDs, or contracts for difference,

have taken their place among otherderivatives such as options in thetoolkit of traders around the country.Their exibility has led to a dramaticgrowth in popularity. In fact, InvestmentTrends research showed that there

were an estimated 22,000 active CFDtraders in Singapore in September 2010.However, you shouldnt forget thatCFDs are a leveraged product whichcarries signicant risks and, despite theirattractions, they must be treated with

care. This guide aims to provide some ofthe basic information you need beforeyou consider trading them.

Proudly No. 1 for CFD educationResults from Investment Trends September 2010 SingaporeCFD Report, based on ratings given by 8,900 investors


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Fractional ownershipYou can buy and sell CFDs either by units or amount. You can alsotrade from as little as 1/1,000 of a unit, or a specic monetaryamount. We refer to this feature of the CMC trading platform asfractional ownership, and it sets new standards in precision andeffective asset allocation. It can be a good way of getting startedwith small trades while you become familiar with how CFD tradingworks. With a traditional broker, the smallest trade size in unitswould be 1 share or perhaps $10,000 in currencies. Using fractionalownership you could decide to invest in a half or even a tenth ofa company CFD or 0.001 units in currency CFDs. It is important toremember that you do not actually own the underlying asset.

Expiry datesAnother aspect of CFD trading involves expiry dates , or length ofholding time. Unlike some other derivatives that have expiry datesand become worthless upon expiration, CFDs do not expire.

Short-term traders may trade CFDs for a few days, while medium- tolong-term investors and traders may trade them over a few weeksor months.

Transaction costsThe difference between the buy and sell price quoted on our CMCtrading platform represents a transaction cost.

For example, say you wanted to buy the Australia 200 index whenthe quoted sell price was 4,570 and the quoted buy price was 4,571.If you were to buy 1 unit for 4,571 but then immediately sell at 4,570before the price changes, you would incur a loss of $1. In otherwords, the price has to rise by 1 point before you can break even onthe deal.

In this example, you can see that the smaller the spread, the less themarket needs to rise before you break even, so the less it will costyou to enter the transaction.

NB For products like indices that trade 24 hours, spreads can widenwhen the underlying exchange is closed.

There are no distinct commissions or transaction fees associatedwith CFDs on the CMC trading platform. We have removed theseindividual charges and built the cost of trading into the price quotedon screen, providing greater transparency. This will have the effectof slightly widening the spread between the buy and sell price oncompany instruments compared to the underlying price quoted onthe exchange.

NB Other charges may apply and you should refer to our RiskWarning notice and Terms of Business. All of these documents areavailable on our website at cmcmarkets.com.sg/legal/cfds .

Holding costs

What are holding costs?For each CFD position that remains open at the end of acalendar day (17:00 New York), a transaction holding cost will becalculated and applied. The transaction holding cost comprisestwo components: the borrowing cost , which is applied to theunfunded portion of the CFD position, and the carrying cost ,which is equivalent to the cost of holding the underlying asset. Thetransaction holding cost is applied to the total value of the CFDposition.

Holding cost = Borrowing cost + Carrying cost

NB If the CFD is not priced in your local currency, the current CMCMarkets currency conversion rate would be applied to the holdingcost total.

What are the borrowing costs?Applies to index CFDs, company CFDs and commodity CFDs only.

When you open a CFD position with CMC Markets, which you dontfully deposit as margin, a cost is applied to the value of the unfundedportion of the position. We calculate the rate applicable to theborrowing cost based on interbank lending rates.

Borrowing cost = (Total position value - Margin) x Borrowing rate 365

NB Borrowing costs do not apply to precious metals.

What are the carrying costs?Applies to commodity CFDs and currency CFDs only.

Investing directly in some assets carries an associated cost orbenet of physically holding that asset for a period of time. Forinstance, if you buy crude oil, there is interest, storage and seasonalcosts (or benets) associated with holding that crude oil until thedelivery date. The carrying cost represents the cost involved in

holding an asset.

Carrying cost =Total position value x Carrying rate long / Carry rate short

365

NB For company CFDs and index CFDs, carrying costs do not apply.

Managing riskCFDs are speculative products that are highly leveraged and carrysignicantly greater risk than non-leveraged investments such asordinary share trading.


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Point of comparison CFDs Options Warrants

Traded on margin Yes your choice No Yes

Can be traded long or short Yes Yes Yes - call/put

Dividend payment Yes No Yes instalment warrants

Expiry date No Yes can expire worthless Yes

Stop loss orders Yes No No

This table is a comparison of CFDs, options and warrants that may help you understand derivative products in relation to one another.

CFDs may not be suitable for all investors. It is possible to incurlosses in addition to any fees and charges that apply. These losses

may be far greater than the money you have deposited into youraccount or are required to deposit to satisfy a margin requirement.

It is important that you fully understand the risks involved beforetrading. You should carefully read our Risk Warning notice which isavailable from our website at cmcmarkets.com.sg/legal/cfds . Wealso recommend that you seek independent advice. You shouldconsider whether trading in CFDs is right for you given your personalcircumstances (nancial, taxation and otherwise).

Our education servicesDemo account . Are you new to investing and looking to try a fully

functional investment and trading experience without risking yourown money? Or are you an experienced investor wanting to test outnew strategies in a risk-free environment? Whatever your reasons,you can get access to our unlimited demo account in less than 60seconds. We strongly recommend that you practise using the demoaccount before opening a live account.

Ongoing education . CMC Markets provides extensive education oncharting, technical analysis and risk-management tools, all coveredin our free webinars.

How do CFDs stack up againstother derivatives?As a nancial instrument, CFDs have features that may make themattractive to both traders and investors. They also carry signicantrisks.

Transfer your existing knowledge to CFDsPossibly the greatest benet for traders using CFDs is that theirprice is in line with that of the underlying reference instrument. Thismeans that the methods of analysis you may have previously appliedto products such as shares can also be applied to trading CFDs.

Exposure to international marketsCFDs open up a whole new world of nancial markets, including

those in the US, UK, Europe and Asia, which have not previously beeneasily accessible to Singaporean traders. CMC Markets offers CFDs

on international companies, indices, commodities and currencies.

All nancial markets, from the most simple to the most complex,have individual features that may make them attractive orunappealing to investors. If considered properly and tradedaccording to your personal risk prole, derivatives (including CFDs)may play an important part in growing your investment portfolio.

How do they t in your investmentportfolio?After learning more about CFDs and their features, you may wonderhow they t into your investment portfolio. Perhaps you have ahealthy share portfolio that you want to keep growing.

Portfolio diversicationEven if youre a long-term buy-and-hold investor, CFDs can be used totake advantage of short-term protable moves in the market withoutaffecting your existing investments. This means that while your long-term positions are growing over time, you can trade CFDs to deliverprot from short- to medium-term trades. In order to diversify theirinvestments, some traders maintain their share/equity portfolio forcapital gains and ongoing dividend income while also pursuing a CFD

portfolio for short- to medium-term investment or trading.The long-term investor is willing to ride the ups and downs of themarket with a view to capturing long-term gains. However, you maybe able to go quite a long way to smoothing your overall portfoliovolatility by utilising short CFD positions.

You can take on a short position with CFDs to cover the value ofshares that you have, but this is not the only option available to you.

If you consider some short-term methodologies based on technicalanalysis, you may be able to take on short CFD trades basedon downtrending stock prices. Alternatively, if you follow a morefundamental analysis philosophy you may look for sectors of the

market that will be most heavily impacted by current economicconditions.

Investors with a view on commodity prices may at times nd it betterto invest directly in commodity CFDs rather than taking a position


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via a resource or agricultural company shares. Advantages of directinvestment via CFDs can include:

avoiding company-specic risk, such as cost over runs on newdevelopments, or disappointing production due to drought orother weather events

participating more directly in short-term commodity priceuctuations

being able to prot from falling prices via short selling as well asfrom rising prices

Types of CFDsThere are various types of CFDs. They include company CFDs, index

CFDs, currency CFDs and CFDs on commodities. You can easilyaccess the full range of instruments via the Product Library on theCMC trading platform.

When you invest in global products that are not in your local currency,funds are automatically converted at the prevailing CMC Marketsexchange rate to complete the transaction. Prot and loss will bereected and settled in your local currency.

International company CFDs

In addition to Singaporean shares, CMC Markets also offersinternational company CFDs including US, European, UK and Asian.

This means you can trade company CFDs on Google, Amazon,Walmart, Honda, Toyota, Vodafone, BMW, Porsche and other bigbrands that arent available in the Singapore market. Tradinginternational company CFDs offers many advantages, including:

access to bigger and more liquid markets with more tradingopportunities than those available locally

low transaction fees, because you dont have to pay the extraadministrative charges youd pay to trade physical shares inoverseas companies


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FAQs

Q What do the letters CFD stand for? What are you actuallytrading when you trade CFDs?

A CFD is short for contracts for difference. When trading CFDs youreactually trading the margin of price change, or the difference inprice from when you open the position until the time you close theposition.

Q What are the main advantages of trading CFDs?A The ability to trade both short and long, cost-effective entry into

trading, low transaction costs, and the ability of CFDs to be tradedon margin. However, you should remember that investing in CFDsalso carries signicant risks and its possible to lose more than yourinitial investment.

Q Will you get a share certicate when you trade a company CFD?A No, youre not actually buying stock in that company, youre only

trying to capture the price movement between the time you open aCFD trade until the time you close it.

Q How many CFD products are available to trade with CMC Markets?A CFDs are available on thousands of instruments, see the Product

Library on the CMC trading platform or at cmcmarkets.com.sg/markets for full details.

Q Are stop loss orders applicable to CFDs?A Yes. Unlike options or warrants, you can place a stop loss order with

a CFD trade.

Q Are there time limits for holding a position with a CFD?A No. Unlike options or warrants you can hold a CFD trade for as long

or as short a time as you choose.

Q What is the approximate percentage outlay of trading CFDscompared to trading shares?

A Each CFD has different minimum margin requirements, generallyranging from 2% to 20% of the price for most CFDs, With the CMCtrading platforms customisable leverage facility you can dial themargin up or down to anywhere from using no leverage at all to fullleverage based on the minimum margin requirement. There may beother costs to consider, including nancing, but this depends onhow long you hold the CFD.

Recommended additional reading

Catherine Davey, Making Money from CFD Trading: How I turned $13kinto $30k in three months

Mark Douglas, Trading in the Zone: Master the market with condence,discipline and a winning attitude

Curtis Faith, Way of the Turtle: The secret methods that turned ordinarypeople into legendary traders

David Land, CFDs For Dummies

Edwin LeFvre, Reminiscences of a Stock Operator

Marcel Link,High Probability Trading: Take the steps to become asuccessful trader

Jack D. Schwager, The New Market Wizards: Conversations withAmericas top traders

Martin Schwartz, Pit Bull: Lessons from Wall Streets champion daytrader

Chris Tate, The Art of Trading: A complete guide to trading the Australianmarkets

Frank Watkins, Exploding the Myths

Richard D. Wyckoff, The Day Traders Bible


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The Information is not to be regarded as an offer, a solicitation or an invitation to deal i n any investment product or an advice or a recommendation with respectto any investment product, and does not have regard to the specic investment objectives, nancial situation and particular needs of a ny specic person.

Contracts for Dif ference and leveraged foreign exchange trading involve the risk of sustaining substantial losses and are not suitable for all investors. You shouldindependently consider the Information in the light of your investment objectives, nancial situation and particular needs and, where necessary, consult anindependent nancial adviser before dealing in any investment produc t. Risk warning/disclosures and other important information are available at our website:www.cmcmarkets.com.sg or by contacting us at + (65) 6559 6000.

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CMC Markets Singapore Understanding CFDs

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