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SINGAPORE: Amid the recent market volatility, there's been a sharp jump in trading of Contracts for Difference (CFDs).
They are similar to futures contract and although some say they are a good hedge against falling prices and market turbulence, others argue that they are not for the risk-averse.
Europe was where CFDs were first introduced to retail investors in the late 1990s.
A CFD is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract.
Trading in CFDs is similar to investing in stocks but in the case of CFDs, one does not have to own the stocks in order to sell them.
Christoffer Moltke-Leth, Head of Sales Trading, Asia-Pacific, Saxo Capital Markets, said: "The advantage of CFDs in a volatile market is that you both have the opportunity to buy and sell; so that's the flexibility of the product that you don't have if you trade normal stocks."
Saxo Bank has seen a 292 per cent spike in trading volumes for CFDs in January this year compared to a year ago, and the bulk came from Europe.
According to Saxo Bank, the number of CFDs traded in Singapore alone has grown by about 300 per cent within the past six months. Still, some market-watchers said that CFDs are not for the faint-hearted as the risks are huge.
Christopher Cheong, Vice President, Securities Investors Association, Singapore, said: "CFD is more suitable for the more experienced traders and those who are more disciplined.
"Investors can use it after they have learnt more about the product. But they must realize that being a leveraged instrument, they must resist the temptation to overtrade and they can do so by controlling the trading quantity."
One can trade CFDs by opening a trading account with a CFD provider like Saxo Bank, Phillip Capital and MF Global. For Saxo, a minimum investment of S$15,000 is needed. - CNA/vm
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