An Introduction To Contract For Difference (CFD) In Malaysia

Have you tried speculative investments where you don’t have to own the asset?

This type of investment is based on the use of leverage. What “ leverage ” means is that you use a small deposit percentage (also known as required margin or “ initial margin ”) of the total value of the contract to trade CFDs, so you don’t have to commit a huge amount of money in a single investment.

This approach is useful for diversifying your investment portfolio. One of the ways that investors can now enter this arena of speculative investing is CFD trading.

A CFD allows investors to participate in the price movement of an underlying asset without owning the asset. One of the main characteristics of a CFD is that it is a leveraged investment product; you are only required to pay a small percentage of the total contract value to exchange the product.

How does CFD trading work?

A CFD is a contract between two parties – an investor and a CFD broker – to exchange the difference in value of a financial product (stocks or derivatives) between when the contract opens and closes. A CFD investor never actually owns the underlying asset, but rather receives income or suffers losses based on the change in the price of that asset.

An investor can be a buyer or a seller! The buyer assumes that the value of the asset will increase; a PURCHASE (long) open position can be set. While the seller expects the value of the asset to decrease, an open (short) sell position can be placed. In order to close the open position, the investor must purchase an offsetting trade. The net difference in gain and loss is settled in cash through their trading account.

While you could theoretically enter into a CFD for anything, guidelines set by the Securities Commission Malaysia limit trading to stocks and indices that meet strict criteria. These include listing on Bursa where the stock exchange is listed with a capital market regulator that is a signatory to the International Organization of Securities Commissions Multilateral Memorandum of Understanding regarding consultation and cooperation, and information exchange between securities regulatory authorities (IOSCO MMoU); and have at least RM 1 billion in market capitalization.

Step-by-step example of a CFD investment

Still not sure how CFDs work? Here is a simple example to illustrate how it works.

What goes “long” or “short” in CFD trading?

These two terms will appear if you are trading in CFDs.

For regular investors, the goal is to buy low and sell high. After all, it’s an easy concept to understand and the easiest way to earn money from an investment. Buying at a certain price with the expectation that the market value will increase is called “long exposure” or “long exposure”.

What Andy, in the example above, does above is the “long exposure” strategy.

However, investors can also try to take advantage of a price drop. This usually happens by selling stocks or derivatives on the promise to buy them back at a later date in the hope that the price will drop in the future. This investment move is known as a “short exposure” or “a short position”.

In the example above, if Bob sells at RM 0.80 each and buys the same B share again expecting it to drop even lower than RM 0.80, Bob adopts the strategy of “short exposure”.

A CFD can be opened for “long” or “short” exposures. The more the market moves in the direction in which you are positioned (the direction of the market favors you), the more profit you make. (provided the market direction favors you).

Speculating on these future movements in the market price without investing in them directly can provide many opportunities for investors who do not need to find the full amount of cash to purchase the asset.

How do you start to invest in CFDs?

Phillip Futures offers an easy entry into the world of CFD investing in Malaysia. This ease of access extends not only to high value stocks, but also to foreign equity markets which may be difficult to reach for local investors due to regulations or simply because of additional fees.

Phillip Futures is the first futures brokerage firm in Malaysia to offer online trading on specified local and overseas exchanges. They are also one of the first brokers in Malaysia to offer CFD trading.

With Phillip Futures, you can:

  • Start trading with margins as low as 10% *
  • trade using leverage without owning the actual asset
  • trade CFDs in Malaysia and USA on one platform
  • trade CFDs on foreign stocks without opening a trading account with offshore brokers
* varies depending on selected CFD stocks

Additionally, CFDs traded by investors on Phillip Futures are 100% identical to the actual exchange prices using a Direct Market Access (DMA) model.

CFD Risk Disclaimer:
This advertisement has not been reviewed by the Securities Commission Malaysia and is provided for general information only and does not constitute a recommendation, offer or solicitation to buy or sell any investment product. It does not take into account your specific investment objectives, your financial situation or your particular needs. Trading CFDs involves a certain degree of risk and may not be suitable for all investors.You should recognize that CFD trading involves trading on the outcome of the price of a financial instrument (for example, stocks) or an index and you will not have a right to delivery or an obligation to deliver the underlying instrument or its ownership or any other interest in it. You may wish to seek advice from a registered representative, under a separate mandate, and carefully read the applicable terms and conditions and the risk disclosure statement before making a decision whether or not to invest in these products.

For the full disclaimer, please visit https://www.phillipfutures.com.my/phillip-futures-cfd-risk-disclaimer/

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Jothi Venkat

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