This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, published half yearly financial statements, June 2019). All views expressed in the article are the independent opinion of Dollars and Sense and do not in any way reflect the views, opinions, or endorsements of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”).
As the biggest financial market, the U.S. stock markets contain some of the most valuable companies in the world. Through the U.S. markets, we can invest and trade in the shares of household names like Apple, Alphabet, Amazon, Microsoft and Facebook.
Given that the U.S. market is the biggest in the world, it goes without saying that it presents ample opportunities for investors. However, besides investing in the shares of companies on U.S. stock exchanges, you can also make short-term trades to benefit from price fluctuations on their shares.
This can be done using Contracts For Difference (CFDs), which is a type of derivative that acts as a contract between two parties to exchange the difference between the price of an asset – from its opening position to its closing position.
To trade CFDs, you can use a CFD provider such as IG, the world’s No.1 CFD provider (based on revenue excluding FX, half yearly financial statements July 2019).
As someone based in Singapore, here are 5 questions you should consider before trading U.S shares.
#1 Are You Intending To Invest Or Trade?
Investors have a mid-term to long-term time horizon during which they expect prices of the assets they invest in to increase in value. Holding period for investors typically ranges from at least a few years to 10 years or more. Day to day price changes are less important to investors.
Traders, on the other hand, make trades based on the intent to capture short-term price differences and generate profits from market volatility. Traders can opt to take either a long position (buy the stock because they think prices will increase) or a short position (sell the stock because they believe prices will decline).
An easy way to understand the main difference between investing and trading is to look at the intended holding period for the shares you trade. If you are looking to trade because you think prices are low today and will increase shortly in the future, then you are trading. If you are buying a share because you believe the company has the potential to grow in value over the long-term, then you are looking to invest.
#2 Owning The Underlying Assets
When you buy shares through your brokerage firm, you typically own the shares that you buy. This means you have partial ownership of the company that you invest in, regardless of how small this portion might be.
In contrast, when you buy a share via CFD, there is a contractual agreement between you and your CFD provider that you will exchange the difference in prices of the shares between the opening and closing positions of the trade.
This means you don’t actually need to own the shares that you are trading when trading with CFDs. Which brings us to our next point.
#3 Your Counterparty Risk
As explained above, when trading via CFDs, the party which will pay you your profits is the CFD provider that sells you the position. This is unlike selling a share you own, where it’s sold to a buyer in the stock market.
It’s also for this reason that you should always buy a CFD from a provider you trust. Though few and far between, the risk of defaults – where a counterparty doesn’t pay its clients the profits attributed to them – does exist.
To reduce this default risk, use an established and reputable provider. If you are trading from Singapore, it’s prudent to be using a provider such as IG Singapore, which is regulated by the Monetary Authority of Singapore (MAS). This gives you the assurance that the firm operates based on the stringent regulations that MAS has put in place.
#4 Currency Risk That You Are Facing
As Singapore-based investors and traders, we are always exposed to foreign currency risk when we invest or trade in assets that are denominated in foreign currency, such as U.S. shares.
For example, if we take a long position in a U.S. company and the price of the shares increases, we should theoretically make profits. However, if the US Dollar (USD) depreciates against the Singapore Dollar (SGD) during this period, then the gains we generated will be offset by the depreciation of the USD. Once converted back to SGD, our earnings may be significantly reduced or we might even be making losses.
On the flip side, if the foreign currency fluctuations goes in our favour, then we might profit from it. In any case, currency risk is something all traders should be aware of.
#5 The Use Of Leverage
Leverage is a double-edged sword.
On one hand, traders can generate a much higher return on their capital with the use of leverage in favourable scenarios. At the same time, since leverage increases the size of your trade position, your potential losses will be magnified if prices move against you.
For example, if there is a margin of 10% on a shares CFDs, you can place a trade position of $10,000, for an account balance of at least $1,000.
If you are trading, it’s always good to be able to maintain a margin that is much higher than the minimum requirement. For example, if you are taking a trade position of $10,000, you might want to have an account balance of $2,000, which gives you a 20% margin. This allows you to have a safety margin so you don’t end up having a margin call (mandatory topping up of your trading account) in the event that prices move against you.
Start Trading The U.S. Markets
IG Singapore offers its clients the ability to trade on more than 6,000 different shares from the U.S. markets. These include some of the leading companies in the world such as Alphabet, Amazon, Apple, Alibaba and Berkshire Hathaway.
One advantage of using CFDs is the ability to either take a long or short position. If you think the stock price of a particular company is going to decline, you can choose to buy a short CFD position. Do note that not all companies are eligible for a short position. You can find out more about the companies which are available as well as the commission charges IG shares trading.
An added advantage that Singapore traders enjoy is that while the U.S. stock market only opens at the usual trading hours of 9:30am to 4pm (Eastern Standard Time), IG allows its clients to also trade key companies during both its pre-market and post-market time. For example, clients can trade the U.S. market during pre-market hours from 4:00am to 9:30am (Eastern Standard Time), which translate to 5pm to 10:30pm Singapore time, making it a lot more feasible for Singapore who are in a different time zone.
If you are new to the IG platform, it’s advisable to start with a demo account first. This will allow you to get familiar with the IG trading platform as well as to try out different trading strategies that you may have. You can also improve your trading skills through the various webinar and trading courses offered by IG Academy.
From now till 31 March 2020, IG Singapore is offering a promotion where the minimum commission for trading U.S. Share trades will be reduced from US$15 to US$8. In addition, if you qualify as an accredited investor, you will also get to enjoy this promo rate permanently. Find out more about this promotion here.
IG provides an execution-only service. The information in this article is for informational and educational purposes only and does not constitute (and should not be construed as containing) any form of financial or investment advice or an investment recommendation or an offer of or solicitation to invest or transact in any financial instrument. Nor does the information take into account the investment objective, financial situation or particular need of any person. Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of your investment, under a separate arrangement, as you deem fit.
No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of the information. All forms of investment carry risks. Trading in leveraged products such as CFDs carry risks and may not be suitable for everyone. Losses can exceed deposits.
This article has not been reviewed by the Monetary Authority of Singapore.