A week ago, I decide to sign up for a Demo Account with a Local Trading Firm to try out CFD (also known as Contract For Difference) Trading for some of the Stocks in Singapore.
I have some experience (learning still in progress) with buying stocks so I would like to try out this new (to me…) investment tool to see if this can be another option for growing my current investment budget (this is a sum of money that I set aside from my monthly income for investment purposes).
So if you do not know what CFDs are all about and would like to have a little insight to the pros and cons of using this investment tool, do continue to read on…
Disclaimer: What I am about to share is based on my one week experience and I may not be able to give you the full picture of it. There are books written for this particular field as well as workshops / seminars conducted to let you know more if you are really interested to explore further…
My Understanding Of CFDs
– In General
CFD is basically a leveraged tool for investors to invest into bigger lots of a particular stock (be it a Blue Chip or Penny Stock) for just a fraction of the current price. This fraction is usually at 10% – 20% which means if you are investing into 10 Lots of a $2 Stock, instead of paying $20,000 for it, you go into a contract using CFD and pay just $2,000 (assuming it is 10% of the $20,000) thus giving you more investment opportunities.
CFD also allows you to invest in different directions of the market which means you get to invest for stocks prices that are rising or falling (in normal investing, you only get to profit when your stock rises in price or gives away dividends).
The next thing that you get with CFDs is that you get to invest in multiple products (commodities, forex and indices) across multiple markets (which you do not really get unless your trading firm has such options).
– With Regards To The Trading Platform
Most trading platforms would require you to make a deposit before you get to trade (this amount includes two components – one for buying into the contract and one for settling the charges so make sure you have deposited enough before you trade) and come with advanced trading tools like the ability to stop loss at a rate that you determine.
The Positive Side Of CFDs (Which Makes You Richer)
So if you have predicted that the stock that you wanted to buy will rise in a few days time and indeed it did – from $2 to $2.50. If you have invested the $20,000, it would become $25,000 – making you a cool $5,000! But with CFDs, you will still be making $5,000 but it’s with an initial investment of $2,000 – a return of $3,000 (excluding the necessary fees and commissions)!
Should you have gotten 10 of such contracts, you would have made a total of $30,000 (profits) as compared to just making $5,000 from a single investment!
The Negative Side Of CFDs (Which Makes You Poorer)
If your prediction decides to go against you and the $2 falls down to $1.50… you will be making a total loss of $5000 (which means you have to fork out $3,000 more out of your own pocket to settle this contract.
Just imagine your luck is so bad that all your 10 contracts decide to go all out against you… you will be making a total loss of $50,000!
Note: The Actual Profits and Losses may not be accurate as what I have stated above so you may wish to consult those Local Trading Firms (which will be providing you with the platform to trade with) on how much you can earn or lose with your trading!
The Fees And Commissions Involved With CFDs (Especially If You Are Small-Time Investor)
If you are those type that invest very small (which means your profit appetite is a few hundreds each time), you may not really get to enjoy the benefits out from investing with CFDs because of the Fees and Commission Charges!
For instance, a usual investment will only charge you an opening commission (usually around $17), an exit commision (which is around $17) and you get to hold on to the stocks for as long as you want… but for CFDs, the charges involve an opening, an exit as well as a Financing Charge (this is the killing factor) – which means that the longer you hold onto your contracts, the more charges you have to pay and all these charges will eventually eat away your profits! Should you be losing money with your contracts and hope that the market will go in favor, the financing charges may not be a favor to you!
A typical two-day of charges and fees add up around a hundred dollars so if your profit is around this range – you have just broken even! And if your stock decides to go on a Quiet Mode… you may have to exit your contract (and possibly making a loss)!
This Is My One Week Investment Experience With CFDs
This wraps up my one week investment experience with CFDs and as you can read… you can really grow your investment (multiple times) as well as lose it (even when you have made some significant profits). This investment tool is definitely not for a small time investor and if you are deciding to go into it… educate yourself well and explore further into the pros as well as cons!
I do hope this sharing has benefitted you!