If you’re new to the world of CFD trading, you might be wondering where to start. Here is a guide to the basics of CFD trading in Singapore, including how it works and what you need to get started. Understanding the basics will better equip you to make informed choices about your trading strategy and investment options.
The CFD market in Singapore
The CFD market is gaining popularity as investors look for new ways to diversify their portfolios and take advantage of market opportunities. CFDs offer many benefits, including the ability to trade on margin, which can magnify profits (or losses). However, before you start trading CFDs in Singapore, it’s crucial to understand how they work and the risks involved in trading.
What is a CFD?
A CFD stands for Contract for Difference, and it is a financial derivative that allows traders to speculate on the price movements of underlying assets without taking ownership of those assets. In other words, CFDs enable traders to speculate on the direction of markets without having to buy or sell the underlying asset.
CFDs are also traded on margin, meaning you only need to put down a small deposit (known as margin) to open a trade. It can magnify your profits (or losses) if the market moves in your favour (or against you). So, while CFDs offer the potential for large profits, they also come with a high degree of risk.
How to trade CFDs
When opening a CFD trade, you will need to choose two things: the size of your trade and the direction you think the market will move.
Your trade size is the contract or traded value usually expressed in Singapore dollars (SGD). When you open your trade, you purchase a contract that speculates the underlying price movements of an asset, such as commodities or stocks. When you close your trade, the difference between the opening and closing price is multiplied by the contract value to determine your profit or loss.
How to open a CFD trading account in Singapore
Here are some things to look for when choosing a CFD broker:
The type of platform they offer- Some brokers offer proprietary platforms while others offer popular third-party platforms like MetaTrader 4 or 5 like Saxo CFD Broker. Finding a platform that suits your trading style and needs is essential.
The markets they offer- Make sure the broker offers the markets you want to trade-in. For example, if you want to trade US shares, ensure the broker offers access to the US markets.
The fees they charge- CFD brokers usually charge a commission on each trade and a spread. The spread is the difference between an asset’s buy and sells price. Make sure you understand all the fees involved before opening an account.
The leverage they offer- Leverage allows you to trade with more money than you have in your account. For example, if a broker offers 1:5 leverage, you can trade with $5 for every $1 you have in your account. While leverage can magnify your profits, it can also magnify your losses.
Tips for beginner traders
Start with a demo account- Most CFD brokers offer demo accounts that allow you to practice trading with virtual money. It is a great way to learn about the markets and test your trading strategies without risking any real money.
Set stop losses- A stop loss is an order to sell an asset when it reaches a specific price and is used to limit your losses in a trade. For example, if you buy Company XYZ shares at $5.00 per share and set a stop loss at $4.50 per share, your trade will be automatically closed if the shares fall to $4.50.
Take advantage of bonuses and promotions- Some brokers offer bonuses and promotions to new clients. For example, you may get a cash bonus or a percentage off your first trade when you open an account. It’s essential to read the terms and conditions of any bonuses or promotions before you sign up.