Buying CFDs

CFDs, otherwise known as contracts for difference, allow one to speculate on the future market movements of the underlying asset, without actually owning or taking physical delivery of the underlying asset. CFDs are leveraged instruments that is usually traded over-the-counter with a securities firm. CFDs are available for a large range of assets. However, in this post, I will only be discussing my experience with CFDs for stocks.

So how does a CFD work? It works similar to a stock. First, you enter into an opening trade with a CFD provider at one price. This creates an open position which you later close out with a reverse trade with the CFD provider at another price. However, the beneficial quality of a CFD is that it allows use to use margin to trade. For me, I could buy CFDs while contributing only 20% of the purchase price. What this means is that the profit is magnified several times. Naturally, the flip side is that losses would be magnified as well. Hence, it is crucial that great caution is exercised while buying and selling CFDs. Let me illustrate this with an example below.

source: cityindex.com.sg
source: cityindex.com.sg

As can be seen from the above example, the profits are magnified by 20x due to the use of margin. However, it is possible for losses to be magnified 20x as well. The commission for trading CFDs is slightly higher than trading normal stocks as well. Nevertheless, the difference is minimal, especially considering the magnification of profits if performed properly.

Having gone through the basics of a CFD, I shall talk abit about my own personal experience with trading CFDs.

YZJ Shipbuilding’s share price had plunged by as much as 20 percent on August 8 due to panic selling stemming from a report that Liu Jianguo, described as a veteran political patron of the shipbuilding industry, was being proved for serious disciplinary violations. In addition, YZJ’s founder and controlling shareholder, Mr Ren had taken leave to focus on assisting in a confidential investigation carried out by PRC governmental authorities. Having evaluated the situation and decided that the panic selling was rather irrational, I bought 10000 YZJ CFDs at a price of 0.94. I then sold them for a profit of 600 dollars a few days later at a price of 0.98. If I had held on longer, my profits may have even multiplied three or four folds. However, I had still managed to make a profit of 600 dollars even though I was only required to put in 1800 dollars as 20% of the total transaction cost.

However, I decided to try trading CFDs again with a different counter, this time Venture Corporation. I bought it at a price of 15.40 around the start of September, and I intended to short sell it as I thought that it would drop in price with the ongoing US-China trade tensions. However, the trade tensions thawed over the next few weeks and my stop-loss position meant that my CFDs were automatically sold. I lost about 600 dollars this time.

From my two experiences, I gleaned some valuable lessons. First, it is close to impossible to time the market, and it should not be done with CFDs which has the potential to magnify the losses. However, trading CFDs can bring in profits if conducted cautiously and without unnecessary emotions clouding one’s judgement. It is important to target CFDs of stocks which have declined in prices due to short-term events which are not likely to result in a sustained decline in prices. The market is irrational after all, and it is to our benefit if we use this to our advantage. However, such opportunities do not come by often, and one should seize the moment once it arises.

Changing my brokerage account

When opening a brokerage account, there are 2 options: custodian accounts or CDP accounts. For  stocks held in your CDP account, you legally own a share of the company. Hence, you would be invited to attend AGMs, and you will receive other forms of shareholder communication. As for custodian accounts, your brokerage firm will be the ones notifying you regarding any corporate actions.

If you have no interests in attending the company’s AGMs, custodian accounts are more likely to appeal to you. Custodian accounts typically charge a lower commission rate as compared to CDP accounts. Personally, I started off with a DBS Vickers Cash Upfront Account as DBS Vickers allowed me to open an account even though I was under 21 years old. However, I recently opened an account with Saxo Trading as it offered lower commision rates and easier access to equities from all over the world. The difference in commision rates is starker for US stocks as compared to SG stocks.

Commission for US stocks

Saxo commission
Source: https://www.home.saxo/en-sg/rates-and-conditions/equities-and-etfs/commissions

VS

DBS Vicker commission
Source: http://www.dbs.com.sg/en/pricing/fee-schedules/singapore-accounts

Commission for SG stocks

Saxo commission
Source: https://www.home.saxo/en-sg/rates-and-conditions/equities-and-etfs/commissions

VS

DBS commission
Source: http://www.dbs.com.sg/en/pricing/fee-schedules/singapore-accounts

In order to further entice new customers to open trading accounts with Saxo, it currently offers a referral bonus of $150 for the refered customer. However, there are a few terms and conditions that have to be fulfilled such as a minimum deposit of 3000 SGD and the execution of 3 margin trades (Forex and CFD). The process to opening a new Saxo account is fuss-free and relatively easy. Do approach me at nicholas_tanzs@hotmail if you are interested in seeking my help to refer you for a new Saxo trading account! Since I will receive $350 as a referral bonus as well, I am willing to share an additional $100 if you need me as a referer.

Sub-strategy: “averaging down”

Before I write a blog post on my main strategy in investing in equities, I shall first talk about a useful and seemingly simple “sub-strategy” which I had adopted: “averaging down”. “Averaging down” involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made.

The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower break-even price for the stock position and higher gains as compared to the situation in which the price of the stock was not averaged down.

From my own example, I had purchased Singtel at a price of $3.86 in July 2017 which was too high of a price to pay for Singtel. However, the price of Singtel plummeted to $2.96 in March 2019 due to the release of poor financial results. This was a good opportunity for me to purchase Singtel to “average down” the price of Singtel stocks I owned. However, it is important to note that there are some caveats to employing the “averaging down strategy”.

Averaging down should be done on a selective basis for specific stocks, rather than for every stock in a portfolio. This strategy is best restricted to high-quality blue-chip stocks. Such stocks have a positive long-term track record, strong competitive position, very low or no debt, stable business, and sound management

Before averaging down a position, the company’s fundamentals should be thoroughly assessed. The investor should ascertain that a significant decline in a stock is not a symptom of a deep-rooted problem. Minimally, factors that need to be assessed are the company’s competitive position, long-term earnings outlook and business stability. This leads me to my upcoming blog post on my adopted strategy with regard to investing in stocks. Stay tuned for it!

Dabbling in REITS

Having suffered significant losses in blue-chip stocks in 2018 due to my ill-timed purchase of Singtel and Raffles Medical stocks in 2017, I was slightly reluctant to further invest in blue-chip stocks. Hence, I decided to turn to REITs or Real Estate Investment Trusts as they offer attractive dividends and relatively stable prices.

My only knowledge of REITs at that point of time was that a REIT collected rental income from tenants, and it distributed the income back to stockholders. However, I was unaware of the different types of REITs and the fact that a REIT was legally obliged to redistribute at least 90% of taxable income. By a stroke of luck, I chanced upon a review of Ascendas Reit on Motley Fool. Understanding it to be one of the most popular REIT in Singapore and with analysts providing buy recommendations, I decided to buy 1000 Ascendas REIT in March 2018 at a price of $2.60. With additional cash in my savings account, I decided to purchase 1000 stocks of Frasers Centrepoint REIT at a price of $2.17.

Fortunately for me, my investments in REITs were profitable as I sold Frasers Centrepoint at a price of $2.43 and Ascendas REIT at a price of $2.90 in May 2019. However, I was lucky to have bought the REITs when they were undervalued without having done my necessary research. Given that real money is at stake, I had decided at that point that my future investments would only be backed by thorough research and with a specific strategy in mind.

First foray into cryptocurrency

My first foray into cryptocurrency was disastrous to say the least, but it taught me a very valuable lesson: the importance of not jumping on the bandwagon without doing the necessary basic research.

It was October 2017. I was only 20 years old then and serving my NS duties. While having some lull time, I was chatting with my great and trustworthy buddy then about Bitcoin and Ethereum which was all the craze during that period of time. Hearing about the background and vast potential of cryptocurrency, I was eager to cash in on this potential money-making trend. Hence, I decided to “invest” $400 to buy 1 unit of Ether (cryptocurrency on Ethereum platform). While $400 did not seem like a huge sum of money, it was actually almost half of my monthly army allowance. However, I did not hesitate as I thought that it was sure to reap the rewards of this “investment”.

As luck would have it, the price of Ether skyrocketed to a high of $1800 at one point at the beginning of January. However, having read about the potential of Ethereum in news articles and the high prices that it could continue climbing towards, my greed got the better of me and I decided to hold on to it. However, my stubborn persistence proved to be fatal as the price plunged to $100 at the end of 2018.

Lessons Learnt

1.NEVER invest in something you have no knowledge about

Just because everyone is buying a stock or a certain investment product, this does NOT mean that you should follow in their footsteps.

2. Investing in Cryptocurrency is highly speculative and risky

It should not be something for a beginner to start investing in.

3. Do the necessary research before investing

Do NOT purely rely on what analysts say because they may have their own vested interests. They may also make assumptions in their calculations which may not be revealed to you.

4. Have a target price to sell the investment product to stop losses

It is easy to let emotions get the better of you. Have a target price to sell the investment product to minimize one’s losses.

5. Have a proper strategy to invest

It is important to adhere to this strategy to reap the rewards. However, the problem may lie in finding a suitable strategy. It is advisable to read up on different investment books to understand the different strategies and approaches and decide which is the most suitable for oneself. I will talk about my own strategy in my upcoming articles. Stay tuned!

Beginning of my investment journey in stocks

Mindset

In 2017, as my savings increased from a 3-digit sum to a 4-digit sum with the excess from my National Service allowance, I was not contented to let it lay inactive in my POSB Save-As-You-Earn account even though the interest rate was a relatively attractive 2% per annum. Hence, I decided to embark on my investment journey.

With my limited financial knowledge, the beginning of my investment journey was truly challenging. The economy was booming in 2017 and it seemed like it was the best time to start investing. Armed with the savings from my NS allowance, I decided to take the plunge and opened an account with DBS Vickers. Investing in unit trusts or saving bonds or even exchange-traded funds were out of the question for me as I wanted to actively monitor my investments and gain experience from my initial investments. My strategy then was simple but essentially non-existent: all that I intended to do was to purchase blue-chip stocks which were given “buy” recommendations from different sources such as investment analysts as well as investment blogs.

Even though I understood the terms used in the reviews and recommendations from my basic economics knowledge, my limited financial knowledge meant that I did not appreciate the underlying assumptions made in the recommendations. I was unable to conduct my own analysis as well. However, I thought that investing in blue-chip stocks will be almost risk-free and suitable for a beginner like me.

First stock: Raffles Medical

The first stock that I decided to buy in July was Raffles Medical for a few reasons:

  1. It was a blue-chip stock
  2. It was in the healthcare industry which I thought had great potential for growth considering the increasing reliance on healthcare

It turned out to be a really poor investment. I purchased it at $1.38 in June 2017. Its price now is only about $1.03. However, the silver lining in the dark cloud is that the company’s fundamentals are still strong.

Second stock: Singtel

The first stock that I decided to buy in July was Singtel for a few reasons:

  1. It was a blue-chip stock
  2. It paid attractive dividends (~5.4%)
  3. Analysts were confident of its prospects
  4. Everyone of all ages seemed to be holding on to Singtel stocks.

At that time, Singtel’s price was $3.86 and it did not occur to me that it might have been too expensive. Hence, I decided to buy Singtel stocks. It turned out to be an unwise decision as the price plummeted to $2.90 in 2018 before recovering to a current price of about $3.20. Similar to Raffles Medical, the company’s fundamentals are still strong.

Lessons learnt:

1. It is important to invest with a strategy in mind. 

Investing without a clear and well-thought out strategy is akin to gambling.

2. Both fundamental and technical analysis of stocks is important.

My mistake was to completely neglect the technical aspect of investing and merely focus on the fundamental analysis. This was not practical, especially given the poor knowledge I had of a company’s financials at that time. Moreover, purely relying on fundamental analysis will not be effective in the short to mid term.