With the recent news about the hike in Singapore’s annual inflation rate to 7.0%, many in Singapore are looking for ways to grow their wealth. Some of the options available include Bonds, Stocks, Fixed Deposit (FD) accounts and Contracts For Difference (CFD).
In this article, we will focus on CFDs and how you can grow your wealth with IG, the world’s no. 1 CFD provider in today’s volatile markets.
Table of Contents
What is Contract-For-Difference (CFD)?
CFD is a derivative product which allows you to speculate on different financial markets including shares, forex, indices, and commodities without taking ownership of the underlying assets. In short, you are trading the difference in the price of an asset from the point at which the contract is opened to when it is closed.
How to Trade CFDs
Unlike investing in shares, where investors profit if the asset grows in value, CFD trading is bi-directional and traders have the opportunity to profit from both a rising and falling market.
Speculation (Going Long / Buying)
To project for an increase in market value is referred to as buying or ‘going long’. For example, if you are expecting the price of Apple shares to increase, you can buy a CFD share of the company and sell it when it rises in value.
|Illustration For Going Long:|
|Profit (Close - Open)||USD$10|
By opening a position at USD$150.50 and closing it at USD$160.50, CFD traders can make a profit on the difference, which in this case is USD$10.
This is similar to a traditional trade which profits as the market rises in price.
CFD trading is leveraged, which means traders do not have to commit to the full trade value from the get-go. For example, if you were to invest in 500 Apple shares, you will only need to put up a fraction of the total trade value.
This provides traders with capital efficiency as they can gain more exposure using CFDs, compared to trading traditional shares.
Do note, however, that profits and losses will still be calculated on the full size of your trade value, which means your losses might exceed your current capital.
This is why you must pay attention to the leverage ratio of your trade and make sure you’re trading within your means.
When opening a position, an initial margin is required, which is a fraction of the full trade value.
You will need to, at all times during which you have any open transactions, ensure that your account balance is equal to at least the maintenance margin that is required for all open transactions.
If the capital in your account is not enough to keep your positions open, you will be put on margin call.
Hedging (Going Short / Selling)
CFDs can also be used to hedge against losses in an existing portfolio.
For example, if you believe that some shares in your portfolio could suffer from a short-term dip in value, you can go short on the same shares.
In this way, the loss in your portfolio value when the share prices drop can be offset by the profit in your short CFD trade.
For example, you believe that the value of Apple’s shares will dip in the short term due to low profits for FY 2021. What you can do is to assume a short position on Apple CFD shares.
|Apple Shares (Long)||Apple CFD Shares (Short)|
|Profit/Loss (Close - Open)||-USD$20||+USD$20|
|*This is a simplified illustration and there are more factors to take note of during CFD trades.|
What Markets Can You Trade with CFDs?
There are many different markets one can trade with CFDs. IG provides access to over 17,000 markets, including shares, indices, commodities, and forex.
Trading shares via CFDs is becoming increasingly popular as it enables traders to go short as well as long — giving you the potential to profit from markets that fall in price, not just those that rise.
At IG, traders can gain access to over 16,000 international shares along with extended trading hours for certain shares.
Indices are a pool of shares of a firm that reflect the overall trends and performances of a particular market or sector. It acts as a diversification of risks when investing in one individual company.
With IG, you can take your position on over 80 indices markets. Some popular indices include the S&P 500, the Nasdaq 100, Hang Seng, and the Nikkei 225.
A commodity is any raw material or primary agricultural product that can be bought or sold. When trading in commodities, traders are buying or selling various commodities and their derivative products. Energy and precious metals such as crude oil and gold, are also commodities which you can speculate with IG.
Forex is a simplified term for foreign exchange. Traders profit from the price movements and the value of each currency is determined by the demand and supply of the currencies. It is also the world’s most-traded financial market, with transactions worth trillions of dollars taking place every day.
You can take advantage of forex price movements using derivatives like CFDs with IG, where you can gain access to over 90 forex pairs.
CFD Trading With IG
|Features at a glance:|
Other than unique features that’ll allow traders to manage their risk, IG also provides educational content through IG Academy and a demo account for beginners to practise with simulated trades and virtual funds.
A Three-Step Guide to Getting Started with CFD Trading
If this is your first time hearing about CFDs, or you’re not familiar with this product, here are three steps you can take to begin your CFD trading journey right.
1. Hone Your Trading Skills with Virtual Funds
As leveraged products and trading on margins carry risks, it is advisable for first-time traders to practice their skills with a demo account.
IG provides a demo account that recreates the experience of ‘real’ trading as closely as possible.
2. Tap on Educational Resources
At IG, you may access educational materials from:
- The IG Community – where like-minded traders gather to share and discuss trading-related topics with one another.
- The IG Academy – provides courses and resources that help traders build their knowledge in the financial markets. You can also download the IG Academy app to access these resources on the go.
- DailyFX - Launched in 2002, DailyFX.com is a free news and research website from IG, and is one of the world's leading sources for news and analysis on currency, commodity and index trading community.
3. Study Trading Strategies
There are different strategies that people can adopt to maximise profits when trading different markets. DailyFX, a wholly-owned subsidiary of IG, provides free trading guides that you can download to learn about the basics of trading and how one can navigate the markets with confidence.
Once you are more familiar with CFD trading, you can click here to open a live IG account.
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This advertisement is issued by IG Asia Pte Ltd (“IG”) (Co.Reg.No. 200510021K) for general circulation and informational purposes only. IG is regulated by the Monetary Authority of Singapore and holds a capital markets services licence for dealing in capital markets products that are over-the-counter derivatives contracts and is an exempt financial adviser.
All forms of investments carry risks and trading CFDs may not be suitable for everyone. CFDs are leveraged instruments and can result in losses that exceed deposits, so please ensure that you fully understand, and are aware of, the risks and costs involved. Refer to the Risk Disclosure Statement and Risk Fact Sheet available at IG.com/sg.
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