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CFD is useful for beginners as a simple instrument that behave like stocks and yet more affordable. It is also suitable for experience traders who want to have more ways to optimize their returns as ...
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CFD Stands for Contract for Difference. It was originally developed in early 1990s
in London, and was initially used by hedge funds and institutional traders to hedge (protect) cost effectively their exposure to stocks in the London Stock Exchange.
Among the benefits of using CFDs are: traders require only a small margin (a percentage of the stock price) and because no physical shares changes hand, they also save on UK tax for stamp duty.
Kathlyn Toh, the Director and Chief Trainer of Beyond Insight has been trading in the stock market for 21 years. She started trading CFD since 2008, when it becomes available for more stocks.
Toh said: “It is only in 2010 when more CFD brokers are providing CFD for Top 500 stocks in the US markets (US S&P500) which is the primary market I trade now,
“Now CFD is available in many countries (Stocks & Indices) including Singapore, Australia, UK, New Zealand, France, Germany, Hong Kong, Japan, and many other European countries.
Compare to stocks, CFD is a great instrument for trading, because we trade the movement of the stock price or index, rather than buying the stock itself.
For example, if you want to buy Starbucks shares, it will cost you about US$75 per unit. So if you want to buy 100 units, that will cost you US$7,500 (RM24,225 based on 3.23 exchange rate).
“With CFD, you are not buying the stock, but just trading the difference in the share price from your buy point to your sell point. You only need to pay about 5-10% of the stock price (the difference in margin, depends on which broker you use and the volatility of the stock),
“So, for Starbucks, assuming a 10% margin, you only need US$750 (RM2422) to buy 100 units of Starbucks CFD. In US market you can also buy in quantities smaller than 100 units,” she added.
Toh said Power CFD is the entry level course she teaches at Beyond Insights, which is applicable to investors, short or midterm traders. It covers three powerful strategies on how to buy and sell stocks, indices and CFD with proper money management.
“This course includes six face-to-face and online group coaching sessions that cover step-by-step how to use the CFD broker platform, how to calculate broker margin requirements, and buffer margin required, how to create and manage your
trading plan, as well as executing the strategies taught. It also includes unlimited resits.”
The next level of training is Smart CFD, which covers more advanced trading and protection strategies which includes Intraday Trading (how to buy or sell within a single trading day), Pairs Trading (trade in a pair for protection against market volatility), Portfolio Hedging and additional entry patterns, which allows participants to have more trading opportunities to optimise their capital for higher returns.
The CFD workshop is bundled with Power Investing Workshop which provides a complete solution from Stock Screening, Market Timing, Money Management and coaching sessions to enable you to trade with proper protection.
In this Q&A, Toh explain some of the benefits of trading CFD for both beginners and advance traders.
Q Why is CFD useful for beginners and advance traders?
CFD enable beginners to have a simple
instrument that behave like stocks and yet more affordable since you only need to pay 5-10% of the stock price. For indices, it’s only 1-5% of the index price.
It is also suitable for experience traders who want to have more ways to optimise their returns, as CFD can multiple your return on investment since you only need to invest 5-10% of the stock price, therefore your return is 10-20 times faster.
They can also diversify into more stock with the same money. CFD also allows investors/traders to protect against market risk by having the ability to be on the long side (Buy Low Sell High) or short side (Sell High first and Buy Back Low) which means they can make money on the downtrend, so they are not worried about economic downtrend or market going down.
Q Name three main benefits of trading CFD?
Low cost – Since you only need 5-10% of the stock price and 1-5% of the index price.No Expiry – It is easier for beginners or existing stock investors/trader to learn, compared to Options or Futures which has expiry. It also allows investor to use it for investment purpose or traders to trade short or mid-term.Dividends – You still get dividends even though you don’t own the stocks (as it was designed to model stocks), and you get full dividends even though you are only paying 10% of the stock price.
Q How to trade CFD for long and short term, and up and downtrend market?
If you are using CFD to invest, you need to make sure you top up extra buffer margin, on top of the minimum 5-10% that the broker requires to handle the volatility of the stock.
If you are a short term trader, you will trade based on stock charts, the same way as you have done in stocks, just that it costs you less money now. You also need to put in extra margin to cover until the stop loss point.
Q As a leveraged instrument, what are some of the risks involved?
Leveraged instrument has to be used with strict money management. The main risk of leverage instrument is over-trading.
Since you only require to pay 10% of the stock price, some people may buy 10x more than they should. Instead of buying more of the same CFD, they should use the balance capital to invest/trade other stocks to avoid systemic risk.
Q How to protect against the downside?
I limit my risk to 2% or less of my capital, and I do not buy more than five stocks concurrently in the same direction, so my max portfolio risk is 10% only. If you are not comfortable with that, you can limit the risk to 1% per trade by having a stop loss.
Stop loss is a cut-off point that you want to sell the stocks, if it goes below a certain level, and this can be entered easily using the broker online software where the system will automatically close the position for you if it reaches your stop-loss point, or if it reaches your preset profit- target point.
*Note: Toh will be conducting a FREE Seminar: The Power of Investing/Trading with CFD for 10-20X Higher Returns at Beyond Insights Learning Center on Sunday (June 29) from 2pm to 6pm. Address: 94C, Jalan SS 21/62, Damansara Utama (Uptown), Petaling Jaya, Selangor 47400. For details, visit: www.beyondinsights.net.
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By Gerald Chuah
