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There is more than one way to make money from the stock market.
Traditionally, the main approach that most of us may have heard is “buy low and sell high”. This is a simple concept to understand. If you were to buy a share at $1, you should look to sell it at more than $1 to make a profit. On the other hand, if you sell below $1, you will lose money on your trade.
This is, however, an overly simplistic way of thinking about how to profit from the stock market.
There are different strategies that an investor can adopt when investing in the stock market. For instance, long-term dividend investors could buy the stocks of a company and hold them for the dividend payouts. Other investors may prefer holding on to a stock for long-term capital appreciation, which may even take decades to play out.
Even though we invest for the long-term, we ought to be aware that stock prices can be volatile in the short-term. This is why some investors also choose to trade the markets over shorter timeframes to generate profits. The idea here is that share prices can be volatile in the short-term, even if they remain relatively stable over the long-term.
Knowing how we intend to profit from the stock market, as opposed to just wanting to make money from it, is crucial. This would determine how we invest and what instruments we should be considering.
Buying Shares Through A Regular Brokerage Account
If our approach to making profits from shares is long-term focused (e.g. dividend investing, long-term capital appreciation), we should ideally be investing and holding these shares in a regular brokerage account. Whether held directly or through a custodian account, we purchase these shares in full from the exchange and own them until the day we choose to sell them.
Buying Shares Via Contract For Difference (CFD)
If the approach to making profits from shares is to capitalise on price differences in the short term, we don’t actually need to buy the shares from the stock exchanges and own them outright.
Instead, through Contract For Differences (CFD), we can gain exposure to the price difference from when we enter a trade to the time we exit the trade.
For example, if we buy a share today via a long CFD for $1 and the price goes up to $1.10 in a week, we earn $0.10 per share if we sell it. Conversely, if the price goes down to $0.90, we lose $0.10.
On first glance, buying shares via CFD doesn’t seem all that different from buying through a regular brokerage account. We still make (or lose) the same amount depending on whether prices move in favour of or against the direction of our trades. However, there are some key differences that we should take note of.
With CFD, We Can Trade Either Long Or Short Positions
In finance terms, “going long” refers to the purchase of an asset with the expectation that its value will increase, allowing the investor to sell it at a profit. The opposite of that is “going short”, where an investor sells an asset in the expectation that its value will decrease.
The advantage of CFDs is that it allows us to trade in either direction of the market. If we think the price of a share will go down, we can sell a short position through a CFD contract, and if prices go down, we make a profit that is equivalent to the price difference.
Utilising Leverage
For short-term trades, the movement in the price may not be significant even if a trader is consistently successful in capturing the price difference.
If our trading duration is just one day and the price moves in our favour by 1% for the day, we make only $1 for every $100 that we invest. If we want to make $1,000 in our trade, we have to put up $100,000. This isn’t viable for most retail investors.
That’s the reason why leverage is typically used to increase the size of a trade. For example, if we use IG, Singapore’s No. 1 CFD/FX broker (by total number of client relationships. Investment Trends 2022 Singapore Leverage Trading Report), which provides a 1:10 leverage, we can take up a position of up to $10,000 with just $1,000 in capital. If the price goes up by 2%, we make $200 from our trade, or 20% of our initial capital.
By itself, leverage is neutral. It only increases our position size. However, what this means is that while our potential returns can be higher, our potential losses can also be greater if prices move against the direction of our trade, as any profit or loss will be based on the full value of our position.
This is why risk management is essential for trading. To avoid losing our capital completely in one or two trades that move against us quickly, we should put in place automatic stop-loss levels where our trade positions will be closed once the price level is hit. We can also set price alerts to notify us when prices are moving quickly, with a trailing stop to lock in profits without exiting our position yet and a guaranteed stop to protect against any slippage.
We Don’t Own The Underlying Asset When We Trade Via CFD
When trading shares via a CFD, one key difference to note is that we don’t own the underlying shares that we trade. Rather, we are responsible for the CFD position and any profit or loss that is tagged to the CFD account.
This is why we should always trade through a MAS-regulated CFD provider, as any position we hold is with the providers we trade with.
IG is regulated by the Monetary Authority of Singapore (MAS), and there are strict regulatory requirements prescribed under the Securities and Futures Act and the Securities and Futures (Licensing and Conduct of Business) Regulations.
Access International Stocks Via CFD With IG
If you are thinking of trading shares, you can open a CFD trading account with IG, which gives you access to more than 17,000 markets including UK, US, and international stocks. With more companies across different markets, it gives us plenty of opportunities to find shares that fit into our trading strategies.
For active traders, the time zone is important as well. For example, the trading hours for the New York Stock Exchange (NYSE) and NASDAQ are from 9:30 am to 4:00 pm, Eastern Time (ET) standard time. This is 12 hours behind our time zone in Singapore.
While it is late, for active traders who have a day job, this could actually be a more ideal time than having to trade Singapore stocks during office hours when we are at work. We can also trade while we are on-the-go on IG’s Mobile Trading App, which is available on both the App Store and Google Play.
For those who are new to CFD, it would be good to start off first with a demo account. A demo account allows you to get familiar with the platform that you are using and to explore different trading strategies and markets across different time horizons. Only after you are confident should you consider trading small amounts on a live account.
Moreover, from now until 28 February 2023, you can enjoy a bonus of $168 when you 1) create an account with IG, 2) make a one-time deposit of at least S$5,000, and 3) place one trade during the promotion period.*
Also, for those who trade forex, you can also earn KrisFlyer miles or additional cash of up to $1,000 (in accordance with the value of the forex trades that you make before the end of March 2023).* Learn more here.
* For full Terms and Conditions, click here.
Photo by Wance Paleri on Unsplash
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