Do you wish hedge your position when market turn into a bear market or know how to you use lesser capital to take on opportunity in the market? In this article, let me share with you what is Contract for Difference (CFD) all about.
What is Contract for Difference (CFD)?
Contract for difference (CFD) is a contract between two parties, typically described as "buyer" and "seller". Stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (If the difference is negative, then the buyer pays instead to the seller).
CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments.
Margin requirement
As CFD is an Leveraged product hence it operates like a Margin Account. Margin requirement is the minimum capital you have to park in to the account to have an open position.
Financial charges
You essentially become a borrower by as CFD allow you to trade larger stocks or indices using smaller amount of your fund and borrowed fund. Financial charges are charged on daily, mark to market price when market close
Trading STI index on POEMS.How does it look like?
CFD allowed you to long as well as short the STI index,
Long is to buy first, sell later at a higher price to make profit.
Short is to Sell first, buy back later at a lower price to make profit.
STI Bid-Ask Spread is at 3.6 pips. E.g STI bid price is at 2850.6 while ask price is at 2854.2,
Search for Straits Time Index 5SGD in PhillipCFD or Poems 2.0 you will find the contract.
To calculate the value of contract, every 1 point in STI is valued at 5SGD.
If you buy 1 Contract of Straits Time Index 5SGD at 2850, your contract value is $14250, however margin Requirement in CFD is only 5%, hence = 14250*5%= SGD712.5
if you have a 50point Gain in your profit will be 50x5SGD= $250 (gross profit)
So, what will be the COST in trading STI using CFD under POEMS?
Here is the counter detail for STI
Important advantage of trading STI is the COST.
Financial Charges: 3% p.a for long position and 2.5% for short position.
Minimum Margin requirement: 5%
(lower requirement mean lower stuck in fund, opportunity cost is lower)
Commission Charge: 3SGD per transaction
(Stock market minimum commission charge is at 25SGD and yet you are required large amount of fund to invest )
Other World Indices Information:
Click here for other world indices and CFD Equities costs
Click here for other world indices Contract Specifications
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