Contracts for difference (CFDs) have had a colourful history, stemming back to the early 1990s in London. The instrument was designed initially as a hedging device for professional traders, but by the turn of the century, it had been introduced to retail forex brokers to complement their existing spread-betting product line. It was not long before CFDs were exported to other international markets. Australia was the first of many countries to welcome this type of forex trading, though the vehicle’s early uses were often for trading stocks and indices. CFDs are unique in that the trader never has to purchase the underlying asset on an exchange. The contract is actually between the broker and the trader. The broker will reward the trader with the ‘difference’, the gain or loss realised on the actual asset during the contracted period, but only if the trader guesses correctly on the direction that asset values traverse. Otherwise, the trader may lose their entire investment or retain a small portion of it, based on the broker’s rules. Gains can be magnified with leverage, but losses can also be magnified. Margin calls can also occur with CFDs, especially when the market moves quickly in the opposite direction from the trader’s choice. CFDs are high risk, as evidenced by the loss rates sustained by customers of these items. Due to regulatory restrictions, most brokers must disclose the level of risk to consumers and post the average loss rate for trades, which have ranged from 70% to 80%.
Regulators across the globe have raised issues regarding CFDs, establishing minimum standards for leverage and blocking bonus programmes associated with the marketing of the device. A few regulators, most notably those in the US and Hong Kong, have outlawed any trading of these instruments by citizens native to their countries, but traders may still have the option of seeking out a reputable CFD broker offshore. While loss rates are high, there are ways to profit when trading CFDs. A reputable and regulated broker is a must-have, but a strategy well-founded in technical indicators and hours of practice and preparation on a demo system are necessary investments. Beginners drawn to CFDs, as if they are the latest online gambling rage, are typically early casualties. The ones that invest the time upfront and follow their strategies to the letter when real money is on the line are the ones who prosper. Trading CFDs is legal in Singapore and has gained great popularity over the past five years or more. The Monetary Authority of Singapore (MAS) does not prohibit CFDs, but it does set minimum limits for leverage and requires that customer deposits are segregated in separate bank accounts at Tier-1 financial institutions. The agency does not require that its citizens or foreign residents trade with one of the nine locally licensed brokers. Traders may trade with offshore brokers, but MAS counsels that the broker must comply with regulatory oversight in its home country. If you are interested in CFDs, then here are four of the best CFD brokers in Singapore.