This tool is efficient for expressing a short position on specific counters. It is called Contracts-for-Difference. (CFDs) There are instruments to short indices like Futures and DLCs but that’s for another post.
First and foremost, many people are familiar with the concept of making money through buying LOW and selling HIGH. Profits can be made by selling HIGH and buying LOW too. This is called Shorting, also known as Short Selling. If you believe that markets move up (bull) and down (bear), then why limit yourself in making money only via the upside (bull).
There are pointers to consider before using this instrument as part of your trading investment arsenal and you might not be granted access (even if you want to), because it is a Specified Investment Product (SIP).
You got to put up margin for any position taken, and it varies from 10% to 70% of the contract size. There is leverage involved since full contract size is not required. For simplicity sake, 10% margin already implies 10x leverage (returns multiplier) excluding other costs.
It is an annual rate (got to divide by 365days) that is applied on the contract value charged accrual daily for as long as the position is held. Due to the cost of maintaining the position, it is not advisable to hold for extended periods. Rates can range from 4% upwards.
Other salient points
- You don’t own the underlying security. (a whole bevy of corporate actions impact holding such a position) For example, if you hold short and a dividend is paid out, that dividend is charged against you for denying the rightful owner (you borrowed it to sell first, yet to buy it back) of the dividend.
- Both sides of the transaction (open and close) must be done on the same platform.
- There is Direct Market Access (DMA) and non DMA types (means market making) whereby you participate and not participate in the market queue respectively.
- Where it is non DMA, the broker does market making can present a counterparty risk (remember MF Global)
Other risk factors
- Trading view is wrong. ie If you short and the counter shoots up instead.
- Trading suspension indefinitely. ie You cannot exit from position.
- Broker goes bust. (remember MF Global)
Just to show that I walk the talk, I shorted ComfortDelgro today, using POEMS CFD DMA today 2019-Feb-27.
- It is part of the STI index and the index looks weak after quite a run up. (index proxy effect)
- Brexit drama anticipated. (it is involved in transport business in the UK)
- Locally GoJek has made entrance.
- Hourly Chart counted 3 peaks (Elliot wave).
- More Sellers than Buyers have stacked up.
Fingers crossed, will update on the position.
CFDs belong to the Derivatives Asset Class if you must know. And if you would like to explore how it can be used in conjunction with other instruments to manage risk or express investment views as part of overall portfolio management, please do not hesitate to make an appointment.
I closed the position on the 14th March 2019 at a loss. I incurred not just brokerage losses but borrowing charges as well. The view did not pan out, the GBP rallied during the drama instead. If wrong, gotta realise the losses.