CFDs are an instrument that allows the trader to trade on global markets without owning those products. The world’s largest market for CFD trading is in Europe, where most traders come from. This article will discuss what CFDs are and whether Singaporean investors should engage in CFD trading.
What are CFDs?
A ‘Contract for Difference’ is a financial derivative that reflects the difference between the current value of an asset and its value at contract time. So if you buy a product with a specific price now, you’ll get back more or less money when selling it, depending on how much it grew in value.
The primary distinctions between a stock and a CFD are leverage and ownership. When you buy a stock, you pay the total price for each share. You can bet on the price of security without owning the underlying asset through CFD trading online.
Is CFD trading legal in Singapore?
Yes, CFD trading is legal in Singapore under the Monetary Authority of Singapore (MAS) regulation. There are strict rules which ensure retail investors do not lose their initial capital when entering into contracts involving risky instruments such as CFDs. Furthermore, there is no minimum net worth requirement if the client possesses sufficient knowledge and experience to understand the financial risks involved.
How to legally trade CFDs in Singapore
Before allowing any individual to use its services, a brokerage must check whether they possess enough knowledge and experience. The performance of CFDs does not resemble that of traditional securities like stocks or futures. In other words, losses will exceed the initial margin paid. MAS imposes a maximum exposure limit of 25% for each contract held on an open trading account, regardless of how much profit is made.
When trading with CFDs, no physical securities are being bought or sold but instead, it is a cash position. For this very reason, CFDs are considered ‘speculative products’ under Securities and Futures Act (SFA).
In addition, financial advisory firms that provide advice related to CFDs must first obtain a Capital Markets Services Licence from MAS and a Capital Markets Services Representative Licence for those who give such advice to clients.
To ensure all parties involved are acting ethically, MAS requires brokers to closely monitor accounts they offer CFD trading through. The other thing that sets Singapore apart from many jurisdictions is its culture. Individuals are focused on finding quality financial products and providers along with thorough research before making any decision. For more information on reputable online brokers in Singapore like Saxo Bank, visit website here. You’re trading with Direct Market Access when you trade stock CFDs with Saxo. Commissions and financing fees contribute to our single-stock CFD profits.
What are the risks associated with CFD trading in Singapore?
The fact that CFD trading is highly speculative means that there exists the potential for sudden market movements, which may lead to significant losses if not properly executed. Investors are then over-exposed and engage in elements of market abuse. MAS holds brokers to strict standards to mitigate these risks, which require them to closely monitor the accounts they offer CFD trading through.
So should Singaporean investors trade CFDs? Perhaps not. Many brokers require minimum investments of $50 000 or $100 000 to open a live trading account. This means that your buying price will be significantly lower than the actual value of the instrument, and it may put you at risk if market volatility is high and prices move against you quickly. You’ll need to consider whether CFDs are suitable for you in light of these disadvantages; they’re speculative products, so make sure you understand what you’re getting yourself into.
In Singapore, financial advisory firms that provide advice related to CFDs must first obtain a Capital Markets Services Licence from MAS and a Capital Markets Services Representative Licence for those who give such advice to clients. Additionally, those dealing in these types of instruments must comply with both the Financial Advisers Act and Rules and the SFA. Ensure you use reputable online brokers that comply with the regulations in Singapore relating to CFD trading.