03-11-2011, 07:16 AM
It's basically leverage (up to 10x) and constitutes gambling for many undergrads who have lost tens of thousands of dollars!
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.'
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.'
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