In today’s world, trading has become a popular means of making money. With advancements in technology and the widespread use of the internet, trading has become accessible to anyone with an internet connection. In Singapore, traditional trading methods have been widely used for centuries. However, with new techniques such as CFD (Contract for Difference) trading, it has gained popularity in recent years.
Both traditional and CFD trading have their respective pros and cons, and understanding the differences between them is crucial for potential traders to make informed decisions. This article will discuss the critical differences between CFD trading and traditional trading in Singapore.
Trading instruments
One of the significant differences between traditional and CFD trading is the type of instruments used for trading. Traditional trading involves buying and selling physical assets, such as stocks, commodities, currencies, and bonds. On the other hand, CFD trading allows traders to wager on various financial instruments’ price movements without actually owning them.
In traditional trading, investors have to purchase the underlying asset, which can be expensive and require a significant amount of capital. On the other hand, CFD trading allows traders to trade on margin, which means they can open more prominent positions with smaller amounts of money, making CFD trading more accessible to individuals with limited funds.
Leverage
Another critical difference between CFD trading and traditional trading is the use of leverage. Leverage refers to borrowing money from a broker to increase the size of a trade. In traditional trading, investors have limited access to leverage as they usually have to put up their capital for every transaction.
In CFD trading, however, brokers offer traders higher leverage rates, sometimes up to 1:100, depending on the broker and the type of asset being traded. Therefore, traders can open more significant positions with little capital, increasing their potential profits and risks.
Short selling
Short selling is a strategy used by traders to make a profit from declining markets. It involves borrowing an asset from a broker and selling it with the hopes of repurchasing it at a lower price to return it to the broker. Traditional trading involves physically owning an asset, making short selling challenging and often requires special arrangements with brokers.
In CFD trading, traders can easily short-sell without restrictions, as they do not own the underlying assets. It gives traders more flexibility in their trading strategies and allows them to profit even in a bearish market.
Trading hours
The trading hours for traditional and CFD trading also differ significantly. Conventional stock markets, such as the Singapore Exchange (SGX), have set operating hours from 9 a.m. to 5 p.m. on weekdays. Therefore, traders can only execute trades during these specific times.
In contrast, CFD trading is available 24/7, allowing traders to take advantage of market movements anytime, including after-hours trading. It provides traders with more opportunities to profit from market fluctuations and enables them to manage their trades better.
Cost of trading
The cost of trading is another crucial difference between traditional and CFD trading. In traditional trading, investors must pay various fees, such as brokerage fees, clearing fees, and stamp duties. These fees can add up quickly and significantly affect the profitability of a trade.
In CFD trading, traders do not have to pay these traditional fees. Instead, they produce a spread, the difference between the buying and selling price of an asset the broker sets. It allows CFD trading to be more cost-effective than traditional trading, making it an attractive option for traders.
When you work with Saxo CFD broker, in-house professionals can help explain their fees and provide traders with transparency, ensuring traders fully understand the trading costs.
Risk management
Risk management is essential in any form of trading. However, the approach to risk management differs between traditional and CFD trading. In traditional trading, investors have limited options to manage risk, such as setting stop-loss orders or buying put options.
In CFD trading, traders have access to various risk management tools, including guaranteed stop-loss orders and limit orders. These tools can help minimise potential losses and protect profits, making CFD trading a more attractive option for risk-averse individuals.
Conclusion
Although traditional and CFD trading involves buying and selling financial instruments, they differ significantly in terms of trading instruments, leverage, short selling, trading hours, cost of trading, and risk management. Understanding these differences is crucial for potential traders to make informed decisions based on their financial goals and risk appetite. Ultimately, choosing between traditional and CFD trading depends on individual preferences and objectives. It is always advisable to consult with a reputable CFD broker to gain a better understanding of the market and make well-informed trading decisions.
