CFDs allow small outlay for big bets

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#1
It's basically leverage (up to 10x) and constitutes gambling for many undergrads who have lost tens of thousands of dollars! Confused

The Straits Times
Nov 3, 2011
CFDs allow small outlay for big bets


By Yasmine Yahya

CONTRACTS for difference (CFDs) have become more popular in recent years, and not just among experienced investors.

University students, too, are dabbling in CFD trading more these days.

So how do they work?

A CFD is a financial instrument that allows an investor to bet on the movement of an asset - a stock, currency or commodity - without owning the asset itself.

A CFD investor decides if he wants to take up a long position or a short one: long, if he expects the price to rise, and a short position if he expects it to fall.

One reason investors are attracted to CFDs is that they only need to pay as little as 10 per cent of the price when they buy.

Say you want 10,000 CFDs in Genting Singapore shares. At $1.68 per share, this should cost $16,800. But with a CFD, you put down only 10 per cent - $1,680.

If you take a long position and Genting shares rise by 50 cents to $2.18, and you decide to close your position and take profit, you would still make the full profit of $5,000. This means that with an outlay of just $1,680, you can make a return of $5,000.

But if the share price falls by 50 cents instead, and you decide to exit to avoid further losses, you lose $5,000 against your initial deposit.

Investment experts say these retail investors generally find out about CFDs through advertisements in newspapers and on financial television networks.

'If you want to buy stocks on the stock market you would need about $5,000. With CFDs, you could start investing with just $500,' said Mr Leong Sze Hian, an independent financial adviser and writer. 'That's why a lot of university students are using CFDs. This year alone I have given three talks at the local universities, and each time during the question-and-answer session, most of the questions are about CFDs.'

Mr Keane Lee, founder of Web-based trading software T3B System and an investment trainer, said he has seen rising interest in CFDs among investors attending his free seminars.

The head of premium client management at IG Markets, Mr Jason Hughes, said that the firm has also seen a steady rise in the number of clients since it set up shop in Singapore in 2005.

IG Markets, based in Britain, is one of the largest CFD providers in Singapore.

'There has been a lot of discussion on social media and forums on CFDs and interest has been rising there,' Mr Hughes noted.

But CFDs are certainly not without risks.

Mr Leong has met undergraduates who have lost tens of thousands of dollars - their life savings - on bad CFD bets.

He has also met older investors who have lost millions through the instrument, he said.


'The advertising and marketing of these CFDs tend to focus on their benefits and the high returns you could make, but not enough on the risks.'
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
It is no difference from 'Margin play'.
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#3
Before last week, how many AmFraser, Kim Eng and CIMB Securities' CFD clients were aware that MF Global was their counterparty?
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#4
(03-11-2011, 11:18 AM)wsreader Wrote: Before last week, how many AmFraser, Kim Eng and CIMB Securities' CFD clients were aware that MF Global was their counterparty?

Is CFD the only way to short a stock? Forgive me for this question but I've been long all my life so it's kind of a surprise to know about this CFD-counterparty thing and how it can screw people up.....
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#5
This kind of counterparty risk is seldom taken into consideration for many investors or rather traders. Currently, some banks are offering stock trading and the stocks are held in nominee accounts. Does it constitute a risk?

Although I think Standard Chartered's brokerage fee is attractive, I will still prefer to hold stocks in CDP account.
Paying a bit more for insurance Tongue

Lastly, cash management account offers by Phillips. What are the possible risks involved? How safe is Phillip Money Market Fund? The fund is pretty conservative but if Phillips files for bankruptcy, can we get back the money?

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#6
Since I use CFD, futures, and margin, I can share my viewpoint - which sounds a bit like the US gun lobby's motto:

Guns do not kill, people kill

In this case, it's:

Leverage does not kill, lack of knowledge kills

You don't say cars are bad just because we have an accident...


Below is not an advertorial from me. But I got this email from my PEOMS broker (I think PEOMS must buy me kopi! Any POEMS dealers here?):

Be Confident with a Multiple Award Winning Retail Broker

Dear JARED SEAH

Phillip Securities, winner of multiple awards over the years, is committed to keep your accounts safe in compliance with MAS regulations. As per section 104 of the SFA and regulation 16 of the Securities and Futures (Licensing and Conduct of Business) Regulations, Phillip Securities keeps funds belonging to clients in a trust account designated for clients, which cannot be commingled with Phillip Securities’ funds. This ensures that your equity balance is protected in times of failure.

We would like to assure our clients that Phillip Securities is financially secure and has prided itself to place the interests of our clients as our top priority. We have received numerous queries regarding the recent incident with MF Global, and would like to state that Phillip Securities does not have any exposure to MF Global nor use them as a counterparty to provide CFD products to our clients. Phillip CFD also does not use any of MF Global’s systems in our operations. In your CFD transactions, be assured that Phillip Securities is your counterparty and all clients’ positions are held in Phillip Securities.

Good Reasons to trade with Phillip CFD, Singapore’s largest CFD provider:

Clients’ funds are kept safe in separate trust account
2 modes of CFD trading: Shares CFD & Direct Market Access (DMA) CFD
More than 400 Singapore Equities CFDs to long and short
Enjoy competitive rates
Thank you.

Best Regards,


Just google singapore man of leisure
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#7
Hi , sorry for digging out such old posts.

I am interested in looking for a CFD provider for investment into SGX-companies at first. However, I am looking for a CFD provider with the following features:
1) allows me to vary the leverage I can take for my counters (I am looking to finance only 10-40% of my purchases by borrowing from the provider),
2) have wide coverage of SGX -listed stocks,
3) since I intend to take =< 40% of "debt", I am hoping that the CFD provider charges me only on the amount I borrow and not on the entire market-to-value contract like Philips CFD or Kim-Eng.
4) No roll-over fees, decent commission charges (less than 0.2%) and the interest they charge currently should be less than 3.0% p.a, if interest rises of course I may be willing to take on higher financing charges.

As of now, I know of a CFD provider, CMC, that provides the closet to what I need, but they have a monthly data fee (to me its like a roll-over fee). And they have only a limited number of CFD SGX counters.

Does anyone know of CFD providers that offer all features I am looking for. Thanks
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#8
i know i cannot answer your query. but as the late king of cloves put it simply: if ypu have a dollar then a dollar is all you should invest in.
i am a believer of that thinking.
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#9
Thanks paullow, for the advice of not overstretching your financial limits.

The rationale for a CFD provider was to use some debt and at the same time enjoy the dividends. Right now, I am looking at a counter which gives a yield of around 4-5%. And I am thinking of using CFD to partly borrow for the company which I believe is slightly undervalued with a good management who tries to pay shareholders dividends out of their cash flow generated.

Of course, the risk I am facing is that the company might get an earnings hit and reduce their dividends, which is why I am only comfortable with only using up to 40% of debt financing. 40% of the contract is also an amount I will be able to raise quickly (if the company really goes bust) to pay the CFD provider. In effect, you can say that I am like looking for a property loan that charges less than 3.0% and am paying 60% upfront for my property
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#10
Hi CY09,

Did you think of getting CFD one year ago?
The reason for asking IS i am also thinking of going into it...and it set off alarm ringing in my head...
yes, it is a sign of greed and if it is not managed well, could lead to disasters...

No offences...
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