Futures Trading and Contract for Difference CFD

Futures Trading and Contract for Difference (CFD) are 2 different products with similarities in that both offer high leverage to the trader. They are both highly leveraged derivatives that are based on underlying assets like index, currencies, equities, commodities and bonds. However there are 3 key differences between CFD trading and Futures trading. So what is the key difference?

CFD Contract for Difference

CFD means contract for difference. It gained popularity in the 1990s in the UK as an economical way for institutional traders to hedge their position as it does not incur stamp duties. Introduced into Singapore by Phillips Securities in 2003, it has become a popular way for retail investors to trade. 

Comparing CFD to other instruments

Contracts for Difference (CFD) offers unique advantages and are a valuable tool in a trader's arsenal. It is a unique animal, combining a mix and match of various trading instruments. For example, it provides leverage, similar to warrants, yet unlike warrants, CFD traders can enjoy from positive corporate action such as dividends. 

Best CFD Brokers in Singapore

Choosing the best Contract For Difference (CFD) brokers is part science, part art. It requires an objective and quantitative calculation of the CFD provider's brokerage fees and spreads; as well as a subjective assessment of the broker platform's usability, reputation and yes, even customer service support. In Singapore, CFD has been around since 2003, and is now offered by various brokers. From well known local brokerages which have adapted and began offering CFD since 2003, to international brokers who are relatively new, traders in Singapore are spoilt for choices.

What is DMA CFD Broker

Direct Market Access or DMA CFD brokers mirrors the price and liquidity of the underlying instrument as reflected in the instrument's stock exchange (e.g. the SGX). DMA brokerage fees are normally higher but this may be mitigated by the lower spread that traders can get. Traders using DMA have to subscribe to level 2 data feed, which may cost $20-$60 per month, depending on the exchange in question.

What is Market Maker CFD Broker

Market Maker CFD brokers, also known as non Direct Market Access (DMA) CFD brokers, are the counter party against the trader's trade and they profit when the trader takes a loss. When trading with a Market Maker, one common complaint is the frequent re-quotes especially during times of market volatility or fast moving instruments as the CFD broker needs time to adjust their books to allow for its internal hedging. Re-quotes are simply instances where the trader clicks on the "buy" or "sell" button but instead of a trade confirmation, receives a message that the price is not available at that level. 

CFD Dealing

A lot of people are intimidated by CFD. This is understandable as conventional stock brokers have been around in Singapore for a much longer time. Traditional stock brokerages are also well known brands and banks. Some traders start out observing what their parents do. Well meaning parents often provide advise, and naturally advise their children to start out with traditional stock brokers, just as they had.