Enhanced
Risk Management
Unlike for conventional brokers
that submit the trader’s orders to an exchange (and therefore are subject to
the minimum board lot size of that particular counter in the exchange on which
it is listed), CFD brokers are the counterparties taking the other side of the
trade and can generally accept odd quantities.This means that traders can position size their trades exactly. For example, if a trader, according to his position sizing, is only comfortable to trade 250 shares in Capitaland, he can trade exactly 250 shares via a CFD broker. This high degree of customization is the single biggest advantage CFD brokers have over traditional brokers in Singapore.
Conventional stock brokers either offer limited or no automatic trade entry and exit execution. Some do not even allow Stop Loss orders to be preset as the orders are too far away from the current price. With CFD brokers, these are possible. Automatic trades offers advantages to the trader. They eliminate emotional attachment to the trades by allowing traders to enter and exit trades at a pre-determined level. The trader is also able to adopt a non discretionary hands-off approach without needing to monitor the price throughout the trading hours. By utilising Contingent Orders, traders are able to participate in the stock market without impacting their day job. In Singapore, where many retail investors keep a day job, this feature offers them a higher degree of automation that conventional brokers lack.
Ability to participate in a rising and falling market
It is not too long ago when markets turned
around decidedly in Mar 2009 to swing to market highs. However, that seemed
like distant memories as the market, weighed with prospects of a slowdown in major economies including China, and uncertainty of the potential fallout from the Euro zone crisis,
became volatile and edged markedly lower as of end 2011. Moving forward, we can expect market rallies, when they do
happen, to be short lived. Using conventional brokers, traders are either
prohibited from benefiting from a falling market, or they are given only a handful of stocks to choose from. Most CFD brokers, on the other hand, allow traders to
short a wide variety of stocks. Thus, traders are able to profit from both
rising and falling markets.
Access
Multiple Markets with a Single CFD account
The
CFD broker tracks and publishes the “live” prices on the underlying instrument on their
trading platform. The instruments available for trading include indices, commodities, stocks and even foreign
currencies. Thus, unlike a conventional stock broker, the same single account with a CFD broker allows access to multiple geographic/stock markets and instruments across various asset classes.
The
power of (responsible) leveraging
Leveraging has been termed as a double edged sword, and it
is easy to see why – traders’ profits or losses as a percentage of the capital
traded are magnified. However, educated and prudent CFD traders understand that leveraging is a
powerful tool that if used responsibly offers numerous advantages. Leverage allows traders with small capital to
generate higher returns than is possible when using traditional stock brokers
with no leverage.
Consider the example of a trader with a $10,000 capital who
is sitting on a profitable trade which utilizes $8,000. He is of the view that
the particular’s stock has not run its course, yet he has identified a second trading opportunity which will cost him another $5,000. With the remaining $2,000 in his account balance, he does not have
sufficient capital to initiate the second trade. Rather than miss the trading opportunity, he can harness the 10 times leverage that a CFD broker provides. Through a CFD broker he can now participate in the second trade using just $500. With the 10 times leverage, he can now partake in the second trade size of $5,000.
Smaller brokerage or commission fees
Brokerage or commissions are the cost of placing trades with the broker, and can vary significantly with different providers. The fees charged by a CFD broker are often less than that of traditional stock trading due to lower operating cost. Typically, even within the same CFD broker, different brokerage fees are charged for different types of CFD.
Flexibility to Trade in Shorter Time Frame
Traders are able to trade small changes in the underlying asset price due to the leverage offered by the CFD broker. This allows scalpers or intra day traders to generate meaningful returns within minutes or a few days, compared to weeks or months with the actual stock.
