The risks of CFD trading in Singapore

CFD Trading: CFD stands for Contract For Difference. It is a contract between two parties to exchange the difference in the value of an asset if the price moves in their favour. The contracts are usually derivative financial products, meaning they derive their prices from other assets such as bonds or stocks.

CFD trading is a high-risk investment option that can lead to substantial losses if not done correctly. Here are some of the risks involved in CFD trading in Singapore:

Lack of regulation

CFDs are traded over-the-counter (OTC), so there is no central exchange where prices are quoted. This also means there is no regulatory body overseeing CFD trading in Singapore. As such, there is a greater risk of being scammed or getting bad advice from unlicensed brokers.

High leverage

CFDs are leveraged products, meaning you can trade with a much more significant amount of capital than you have. For example, if you invest $1,000 in a CFD and choose a leverage of 1:10, you will be able to control a position worth $10,000. This magnifies both gains and losses.

For example, if you invest $1,000 in a CFD and choose an investment that gives a 10% return per month (which is unlikely), then after the first month, your investment would grow to $1,100. After two months, you would have $2,210. However, after three months, your initial capital of $1,000 would be wiped out because this type of return is unsustainable – resulting in a total loss of 100%.

However, past performance does not guarantee future results. There is no guarantee that investments with such high returns will continue to do so.

Lack of liquidity and price transparency

As CFDs are traded OTC, they’re generally less liquid than the underlying assets themselves because there is no central exchange for them to trade on. This means that prices can change quickly and without warning – and you could lose more than anticipated if you haven’t set a stop-loss order and your investment isn’t large enough to absorb possible losses. There may be certain events, such as UK referendum results which cause major market movements – meaning investors need to watch out closely for sudden changes in the value of their investments.

Exchange rate fluctuations (if leveraged)

Many CFDs are available as both cash-settled and physically-delivered products. If you trade in a physically delivered CFD, the underlying asset must be returned to the buyer on the expiration date. However, if the CFD is cash-settled, no physical delivery takes place.

The main difference between these two types of contracts is that the value of a physically delivered CFD is affected by changes in the underlying asset’s price, while the value of a cash-settled CFD is not. For example, if you invest in a UK100 CFD that is physically delivered, and the pound falls 10% against the dollar overnight, your investment would drop by 10%. However, if you invest in a UK100 CFD that is cash-settled, your investment would not be affected by exchange rate movements.

If you trade CFDs on forex rates, the same principle applies. If you buy a EUR/SGD CFD, which is physically settled and between your purchase date and the expiration date, the euro strengthens by 10%, then you would have to deliver more euros to settle your position than you initially bought. This means that your investment would shrink by 10%. However, this does not imply that all cash-settled products are less risky than physically delivered ones – it simply means that they’re more flexible and may be easier to manage for some investors.

In conclusion

CFDs are a high-risk investment and should only be used by experienced traders. They can be highly profitable when traded correctly but can lead to significant losses if the trader is wrong about the underlying asset’s direction. For this reason, it is essential to do your due diligence and research before entering into CFD trading. It is recommended that beginner traders contact a reputable online broker from Saxo Bank for the lowest commission and excellent customer service.