Have you ever heard of the term CFD? If you have been thinking about or have been involved in investments in Malaysia, chances are you would. So, what is this all about and how much of it do you need to know?
Diversify your investment portfolio
Basically, CFD stands for Contracts for Difference and it is very much a type of speculative investment. You use leverage to invest in shares in which you make use of a small percentage known as the ‘initial margin’ of the full contract value which can work both ways. What happens here is that you can get involved in the price movement of an asset but technically, you do not own the asset. Whichever way it goes, you pay or acquire the difference in the price.
Who is involved in CFD trading?
2 parties are directly involved. You (the investor) and the CFD broker. You will decide on which underlying asset to invest in and the broker will manage the movement between the opening and closing price of the asset. In this context, you can take the role of either the seller or the buyer. Your role basically speculates whether the value of an asset would increase or decrease.
- You enter into a Buy position if you speculate that the value will go up. This is also known as the long position.
- You enter into a Sell position if you speculate the value will go down. This is also known as the short position.
In Malaysia, the Securities Commission (SC) has certain regulations related to CFD investments. This is to ensure that investors in Malaysia are protected and that nothing outside the law is carried out.
Starting your CFD investments
Generally, you want to buy low and sell high if you want to earn a good profit. In ‘Long Exposure’ or ‘Going Long’, you buy at a particular price with the aim that the market value will go up. However, you can also make some profit if the asset price drops. You will be selling here which is also known as ‘Going Short’ or ‘Short Exposure’.
Whichever side of the market you take, the more it moves, the more money you will profit. That said, it also means that if the market direction is not in your favor, you stand to lose too. This is an interesting investment engine for those who do not have large capital to work with. In most cases, you need to have at least 10% of the underlying asset you want to buy. When the time is up, you will either take home the difference or pay the amount. So, you need to be extra careful not to overinvest in CFD trading.