Forex has been the largest traded market since 2008, followed by stock markets at a distant second. However, Forex is a retail-based market limited to people who have a working capital of more than S$300k, while the average person has about S$5k to invest. There are several workarounds employed by people who want to get into Forex but, due to regulatory restrictions, cannot do so directly.
Contract for difference is similar to an agreement between two parties where one party agrees to buy the asset at its current price while another agrees to sell it at this price. This unique feature enables a small amount of capital to be used to gain a sizable share of an asset’s market value. Opening a CFD account also entails opening a margin trading account where the difference between the buying and selling price is settled at the end of each day instead of being paid as required with shorting or options contracts(click to read more).
Lower capital requirement
CFDs have shallow entry barriers as one needs only to pay 2% on top of the assets initial value as brokerage fees. It allows more people from all walks of life to gain exposure from these markets without depending on banks for working capital loans. It contributes significantly towards improving Singapore’s standing in world rankings by allowing us to tap opportunities that we wouldn’t otherwise be able to.
Highly volatile markets
In the past, retail investors would have to resort to holding blue chips or mutual funds. Still, since CFDs allow one to go long and short, it is possible to make gains from highly volatile markets such as Iran, Russia and South Africa, which are not correlated with Singapore’s economy. Should the local market be on a downtrend, traders can use CFDs to take advantage of foreign markets that are doing well by going long at cut-throat prices while covering their losses if these markets turn south later.
Ability to trade any asset class
Many new investors find Forex boring because they can only trade currencies, making it challenging to earn money unless they spend extraordinary amounts of time and effort studying other currencies. Singapore has one of the largest financial hubs in the region, which enables traders to take advantage of CFDs by trading any asset class they wish, such as commodities, indices, stocks and any currency pair imaginable.
Global market exposure
By trading on global markets, CFDs enable local investors to diversify their portfolios instead of limiting themselves only to equities listed locally. It has positive implications for both long term investors by increasing their gains through better returns while protecting them from severe downside risk if there is a significant economic slowdown in Singapore. It also provides short-term traders with opportunities to make quick money when foreign markets move sharply.
Margin Trading allows you to leverage your capital.
It’s where CFDs allow traders to leverage their capital by 3-20 times, depending on the market exposure they wish to take. It means that you can potentially quadruple your gains while at the same time having an equally significant loss if you are wrong in your trading call.
This feature is so attractive because it allows one to get into markets that would have otherwise been inaccessible due to the high minimum capital requirements. Assuming you are correct in your trading strategy, enhanced risk returns are certainly a welcome change from typical forex investments, which only guarantee returns that do not exceed 1% per day.
Faster order processing speeds
Unlike Forex, which takes about 5 minutes or more for an asset price update after your trade executes, CFDs update in real-time, so it is possible to monitor your investment at all times. It means you can adjust your trading strategy accordingly if the market moves in the opposite direction before your order is filled.