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FX is one of the more popular asset classes amongst traders in Singapore, but recent changes to FX margins could send some looking for alternatives.
As mentioned in our recent article, starting 8 October 2019, the minimum margin for FX traders will rise from 2% to 5% due to new rules put in place by MAS. The new rules do not affect Accredited and Expert investors, but for everyone else, this is a significant change you should definitely take note of.
Why? It’s because this means traders now need to put up a larger sum of capital in order to execute trades of the same size as before. For example, for a $100,000 trade, a trader would now need to deposit $5,000 instead of the previous $2,000 due to the margin change.
Against such a background, we will look into alternatives to trading FX. We discuss some of the available alternatives below.
The term “equities” is used to designate stocks in companies. Equities are widely traded by Singaporeans of all stripes and across the entire risk tolerance spectrum.
Stocks are shares of a company’s ownership, and for investment purposes are typically bought and sold on a stock exchange such as the Singapore Stock Exchange (SGX). Stock prices attempt to reflect the value of the company, and some companies also pay out dividends to their shareholders.
Unlike FX, trading stocks does not have to be a zero sum game, meaning that one trader’s gain does not have to be another trader’s loss. In other words, companies’ stocks can increase in value without necessarily resulting in a decrease in value in another companies’ stocks. This also means it is possible for the overall value of the stock market to rise over time, and for investors to profit from this increase in value.
In FX trading, because currencies are traded in pairs, what that essentially means is that the performance of that pair is in relation to one currency’s performance against another’s. So when these currency pairs move, someone is bound to be on the losing end, depending on which side you take.
An index is an indication of the performance of a certain market and measures changes in price in the market. Since indices track a whole market which will include a basket of securities, some people view trading indices as a less risky investment compared to, say, individual stocks, due to the fact that the risk is spread out over a diversified range of different securities.
Some popular indices in Singapore include the FTSE Straits Times Index (STI), which tracks the top 30 SGX-listed companies, and the MSCI Singapore Free Index (MSCI), which tracks large and mid-cap companies on the SGX.
Like a stock price, an index is just a measure of value. You do not invest in indices per se. Instead, you invest in Exchange Traded Funds (ETFs), which are traded on the stock exchange and track specific indices. For instance, you can buy the STI ETF, which as its name suggests follows closely the performance of the STI. ETFs offer a good way to diversify without needing a big cash outlay.
“Commodities” is an umbrella term used to designate a wide range of goods that can be traded on an exchange, including gold, oil, natural gas and grain.
The most common way to trade commodities is on the futures market, which means that instead of trading the physical commodity, you are simply trading a contract for the commodity. So, no need to worry about finding space at home for the bars of gold you just bought!
When picking a commodity to trade, it’s a good idea to first make sure you understand how a particular commodity’s performance is typically affected by specific market conditions. For instance, gold is considered a safe haven investment that performs well in times of economic uncertainty. Gold prices are actually rising right now due to global anxiety about US-China trade tensions, Brexit and more.
How can you trade these alternatives with CFDs?
The FX market is known for being incredibly volatile. For some people, that’s a good enough reason to stay away. But for others, it might be possible to harness dramatic swings in the market to make gains. Of course, the flipside to that is that you could just as easily lose money in a short span of time, which is why managing your risk is very important (but we’ll get to that in a subsequent article).
So, since we’re discussing alternatives to FX, is there any way we can take advantage of such market volatility when trading other types of assets?
The answer is, yes you can, using Contracts for Differences (CFDs), which enable you to invest in stocks, indices, forex and other asset classes without having to actually buy the assets.
A CFD is the difference in price when you enter a trade and when you exit it. When you buy low and sell high, you are essentially making money out of the difference in price at the start and end of your trade.
So, why trade CFDs instead of directly buying or selling the actual asset? Well, with CFDs, you are able to trade on margins. This enables you to use leverage to make much bigger trades than you are putting up the cash for.
You can trade CFDs for a variety of assets on IG that will enable you to make money from rises or falls in price. You’ll be able to use leverage, margin, hedging and long and short trading to maximise your gains.
Trading on margin with CFDs, when done right, helps you boost your profits considerably.
However, you should also be aware of the risks, as trading with leverage also means you could potentially lose more money, too. IG provides risk management tools that enable you to execute trades according to your strategy and risk tolerance.
Trading with IG new product – Knock-Outs
IG Knock-Outs is a limited-risk CFD product that enables you to trade into a range of asset classes including forex, 24-hour indices and commodities.
Knock-Outs are programmed to close once the market price reaches a knock-out level that has been set in advance by you. You buy knock-outs based on whether you think the market will rise or fall.
No matter what your risk tolerance or strategy is like, you’ll be able to use the IG platform to manage your margins, knock-out levels and trade size in order to optimise each and every trade, this would also mean that you can manage your maximum risks at the start of every trade.
Do you have any questions about alternatives to FX trading? Ask away in the comments!
This advertisement has not been reviewed by the MAS. The information in this article is meant for informational purposes only and should not be relied upon as financial advice. Users may wish to approach a financial advisor before relying on any advice provided by the website to make any decision to buy, sell or hold any investment product. Contracts for Difference (CFDs) are speculative products. The leveraged nature of CFDs involves the risk of losing substantially more than your initial investment.