What are Contracts For Differences (CFD)?

By: Soh Tiong Hum, TerraSeeds Market Technician Pte Ltd

STI Correction

The recent market correction created an unsettling feeling amongst investors and punters. Despite exciting corporate tax incentives that was well received by the market as well as data that suggests Singapore is in the midst of a property boom, many participants in the stock market would exclaim that they have never seen the STI drop by 120 points in a single day (almost 193 points if you consider the STI intraday low of 3039.6 from the previous day's close of 3232.02).

This incident highlights the need for investors to be equipped with risk management strategies. After all, players in any game must not only have great offense but great defense.

Using Contracts for Differences (CFD)

According to http://www.investopedia.com/, a CFD is an “arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities. This is generally an easier method of settlement because losses and gains are paid in cash. CFDs provide investors with the all the benefits and risks of owning a security without actually owning it."

The benefits of CFDs are:

  1. Can be used to sell high and buy low without the penalties of short-selling stock
  2. Unlike options and warrants, it does not expire and therefore does not have time decay
  3. Easy to price because they mirror the exchange traded price of the underlying instrument
  4. Can be a good hedge to a long stock portfolio if the CFDs of the same stocks are short i.e. to achieve market-neutral exposure.

Therefore CFDs can be used in the following manner:

  1. Make money in any market condition. So instead of standing on the sidelines in a falling market, bears can sell high buy low to make money.
  2. Protect the downside for long term investors who hold a long stock portfolio for income or growth reasons.

The need for risk-management knowhow

Local investors need to know risk that will derail their investment plan is present 24-hours a day, 7-days a week and can come from anywhere in any form. It is imperative to have an investment plan that is structured to manage risk. This is also where investors who want to do-it-yourself to grow wealth must accumulate as much knowledge to manage risk.

4-hour seminar discussing market forecast and hedging strategies for the STI

IG Markets ( Singapore ) and TerraSeeds Market Technican Pte Ltd have organized a 4-hour seminar on Saturday morning 24 March 2007 from 9.00am to 1.00pm . In this three(3)-part seminar, speakers will discuss strategies in a falling market as well as the use of moving averages to determine prevailing trend, support and resistance. These two parts will arm individuals with both the ability to make a market forecast and subsequently develop strategies to handle their own investment. There will also be a question and answer session about CFDs as well as introduction to a free real-time intraday charting platform

For more information and registration, visit http://www.terraseeds.com/igmarkets.html or call TerraSeeds Market Technician Pte Ltd at +65 6492 3196.

The global name in CFDs

Trade CFDs with a world leader. IG Markets is part of IG Group, a UK FTSE 250 company, and our unrivalled range of markets includes thousands of Singapore , Asian and world shares, plus FX and global stock indices.

Stay in control of your trading around the clock with our multilingual online platform. Opening a position is quick and easy, and all our products are available through one trading account.

CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit. You should consider whether CFD trading is suitable for you and ensure that you fully understand the risks and costs involved. Please refer to the Risk Disclosure Statement at www.igmarkets.com.sg

About TerraSeeds Market Technician Pte Ltd

TerraSeeds Market Technician Pte Ltd, a Singapore registered company is focused on developing and designing learning programs for Technical Analysis. By introducing learning programs that are tailored for different levels of sophistication, TerraSeeds is able to cater to traders, investors who demand nuance of learning experience.

TerraSeeds Market Technician Pte Ltd may post information and charts related to stock markets. These information and charts are opinions and not recommendation to buy or sell. They may also be outdated. If in doubt, please check with your broker or financial advisor.

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