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Full house at Phillip Securities CFD seminar at National Library on Wed night. Photo by NextInsight


QUITE A number of people who attended a seminar subsequently opened Contracts for Difference (CFD) trading accounts to use the equity derivative to profit from falling stock prices.

Instead of moaning over battered portfolios, the 120 or so who attended last Wednesday night’s seminar at the National Library looked for trading opportunities. CFD is an instrument offering leverage.

First introduced to Singapore five years ago by Phillip Securities, a CFD is an agreement to settle the difference in opening and closing prices of a stock chosen by the CFD trader.

CFD is an equity derivative which simulates buying and selling shares through SGX (the cash market), be it prices, queue volumes or trading hours.

Unlike the cash market though, the CFD trader’s counter-party is a market maker like Phillip Securities and not the Central Depository.

CFD may contribute to stock market activity when the market maker hedges against this exposure on the cash market.

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Phillip CFD dealer Julia Teo enlightened the crowd at the seminar on Wednesday. Photo by Sim Kih

An important point to note is finance charges of up to 8% p.a. of contract values are payable by a CFD client over the period that his CFD position remains outstanding, says Phillip CFD dealer Julia Teo.

This is in addition to Phillip Capital’s broker commission of 0.13%, the lowest among CFD market makers in town.

These financing charges are why the CFD is a short-term trading strategy for volatile stocks, and not for long-term value investing.

When do traders use CFDs?

(1) For leverage

Starting with a cash outlay of as little as S$3,000 in his Phillip CFD account, a CFD trader can buy or sell contract sizes totaling up to S$15,000 (20% initial margin or 5 times leverage).


(2) Extend holding period of trading without capital outlay

Unlike contra-trades in the cash market which need to be closed within 3-4 market days, CFD trades need only to be settled when there is a margin call should the CFD account fall into deficit.

Meanwhile, finance charges accrue from day to day, and a contract renewal broker’s commission is payable every 30 calendar days as long as the contract is kept outstanding.

Most CFD clients close their positions within the month, and many practice intra-day trading, says Julia.


(3) Using CFD to profit from falling stock price

For example, when OCBC Investment Research downgraded SGX to "hold" on 16 Oct, assume a  CFD trader sold SGX at S$5.54.

Some 47 cents was knocked off SGX in the past 5 trading days and it closed at S$5.07.

Assuming our trader maxed out his leverage and sold 2,500 SGX shares at S$5.54 on 16 Oct using CFD, a simple calculation shows that his CFD account a week later at the close of Thu 23 Oct would be:

 

 

    Explanation
Ledger    
Cash deposit  $ 3,000.00  
Less Commisson  $      26.75 0.13% of contract value with a minimum of $25 incl GST
Plus realised P/L    
Plus realised credit/debit interest  $       0.01 0.25% on margin excess
Less realised finance charges    
Ledger Balance  $ 2,973.26 Cash less comm plus realised P/L and charges
Ledger balance  $ 2,973.26  
Plus unrealised P/L  $ 1,175.00 Change in portfolio value is ($5.54 - $5.07) X 2,500 shares
Less unrealised finance charges   7-days interest-free financing
Equity Balance  $ 4,148.26 Ledger balance plus unrealised P/L and charges
Maintenance Margin  $ 2,535.00 20% of portfolio value, now at $5.07 X 2,500 shares
Margin Excess  $ 1,613.26 Equity balance less maintenance margin

 

The trader’s margin excess of S$1,613.26 may be withdrawn without closing outstanding positions after settling unrealized interest charges.

 

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Stock prices already down 60% in the past year, but investors are still bearish.

However, if the stock price had risen 47 cents against his short position instead, the margin excess would have become a deficit of $1,206.74.

Margins are marked to market every day and CFD clients have two working days to top up any margin deficit.

CFD is a potent short-selling and leverage tool


Naked short sellers on the cash market, i.e. those who sell without borrowed scrip, are subject to ‘buying-in’ whereby the SGX closes the short position on the fourth market day after the short sale.   

From 25 Sep 2008, SGX has imposed on traders a penalty of 5% on each naked short contract value, with the minimum penalty at S$1,000.

Since then, CFD has become more relevant than ever, even as falling stock prices have become a more and more predictable trend.

One participant at Phillip’s seminar told NextInsight he keeps a watch-list of stocks with negative news flow, something not too difficult to find in today’s gloomy markets.



Share Prices

Counter NameLastChange
AEM Holdings3.700-0.100
Avi-Tech Electronics0.280-
Best World1.760-0.030
Broadway Ind0.120-
China Sunsine0.390-0.015
DISA0.003-
Food Empire0.640-
Fortress Minerals0.375-
Geo Energy Res0.350-
Golden Energy0.7950.005
GSS Energy0.048-0.001
InnoTek0.455-0.015
ISDN Holdings0.400-0.005
ISOTeam0.090-
IX Biopharma0.125-0.002
Jiutian Chemical0.080-
KSH Holdings0.345-0.005
Leader Env0.056-
Medtecs Intl0.136-0.002
Meta Health0.025-
Nordic Group0.475-
Oxley Holdings0.151-
REX International0.225-0.010
Riverstone0.6250.010
Sinostar PEC0.166-0.029
Southern Alliance Mining0.410-0.090
Straco Corp.0.395-
Sunpower Group0.2750.005
The Trendlines0.092-0.001
Totm Technologies0.102-
UG Healthcare0.190-0.004
Uni-Asia Group0.810-
Wilmar Intl4.070-0.020
Yangzijiang Shipbldg1.380-0.020

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