Why Your Investment Objective As An Investor Determines The Kind Of Instruments You Should Be Using
This article was written in collaboration with UOB Kay Hian. All views expressed in this article are the independent opinion of DollarsAndSense.sg. You can refer to our Editorial Policy here.
After a record 11-year bull-run in the stock markets, typically represented by the S&P500 index, it took just 16 days to tumble more than 20% into a bear market – making it the fastest crash in the history of the stock market.
What followed has been equally entrancing – the best five day price jumps into a bull market in the last 46 years.
While the stock markets are so volatile, the drastic impacts of COVID-19 on global financial markets has definitely captured the imaginations of both new and experienced investors.
Best Time To Invest?
While many existing investors are likely to be sitting on paper losses in the near-term, the sharp decline in asset prices also creates interesting opportunities for investors to accumulate stocks, exchange-traded funds (ETFs) and REITs during this period when prices are lower.
At the same time, many new investors may also be enticed to enter the market because of the current downturn. For these investors, depressed prices may present a once-in-a-decade opportunity to invest in stocks when prices are low.
Another group of investors prefer relying on volatility to profit from the markets. Evidenced from SGX’s latest Q3 results announcement where it announced a surge in trading volume which lifted its profitability to 13-year highs, there may be opportunities to buy at lower prices and sell as prices rebound.
Regardless of whether you are a new or experienced investor or a trader, it’s important that you understand your investment objectives before entering an investment position. While prices may be low, it can go much lower. Right now, we are also at the beginning phase of realising how the coronavirus will impact Singapore and the global economy. For traders, volatility may increase opportunities for profit, and also the risks of larger losses.
Are You Investing For The Short-Term?
Quite possibly, the most important question you should ask yourself is how long you intend to hold on to your investments?
If your investment time horizon is about a year or even much less, chances are that you are likely to be seeking to profit from the volatility in the markets rather than the resilience of the business or a recovery in the economy.
Looking past a company’s ability to ride out such a big shock to the economy, even good and profitable businesses do not grow so quickly. It spans years and even decades, for companies to realise their potential and see their growth reflected in their stock prices.
On the other hand, during periods of heightened volatility, the resilience and ability of strong companies to navigate downturns in the long-term may not completely shield even strong companies from facing dips in the stock prices and experience volatility in the short-term.
For example, between 24 February 2020 and 23 March 2020, SingTel share prices dropped 26% from $3.10 to $2.28. Since then, it has recovered to $2.66 as of 15 May 2020, or an increase of about 17%.
While we don’t know what the immediate future holds for SingTel, it’s not out of the realm of reality to think that SingTel will survive this downturn. It is also not difficult to see how even if prices were to remain generally stable in the long-term, it’s still possible for investors to make use of volatility to capture short-term profits.
Are You Investing For The Long-Term?
As a long-term investor, short-term volatility should not affect your long-term investment positions. This is because when you invest for the long-term, short-term price swings only lead to paper losses or gains.
In fact, a dip in prices may present the opportunity to accumulate more stocks in the companies that you are already invested in and believe will do well in the long-term.
What You Invest In Is Important. How You Invest Is Also Important
Depending on your investment objectives, stocks, bonds, indexes, ETFs or REITs can all be invested for long-term returns or short-term to earn a profit. At the same time, how you invest in these assets also matter.
If you are investing in a company you believe has strong long-term fundamentals and has the potential to be even more valuable in the future, then you should own its stocks and hold it for a long period of time. In this case, you need to open a stock brokerage account to buy its stock. You may also want to avoid borrowing to invest, since borrowing magnifies your position and comes with a cost. Over the long-term, volatility can wreak havoc on your portfolio if you are magnifying your positions and there is also a risk that the stock does not grow uniformly leading to losses from the cost of borrowing.
However, if you are investing in a company because you think there is an overreaction on its stock price decline, and that prices will rebound soon, you may prefer taking a long position using a Contract for Difference (CFD).
You may even wish to use leverage to increase your portfolio exposure and hence get a higher return, while also remembering that the use of leverage will increase your risk. This way, you never need to own the underlying asset and can derive a larger profit with a smaller investment amount.
Use The Appropriate Instruments For Different Investment Strategies
You won’t use a spanner to knock a nail in the wall – use the right tools for the right job matters.
Depending on whether you are investing for short-term profits or long-term returns, you should use the right investment instruments.
If you wish to invest and hold on to stocks, ETFs and REITs, which are listed on the Singapore Exchange (SGX) or other major overseas stock exchanges – such as the New York Stock Exchange (NYSE), NASDAQ Stock Market (NASDAQ), Hong Kong Stock Exchange (HKEX), and Bursa Malaysia – you can use a local brokerage firm such as UOB Kay Hian.
For those who are looking to capitalise on short-term price swings, it may be worthwhile to consider CFDs instead. A CFD is a contract between two parties to exchange the difference between the price of an asset from its opening position to its closing position. When you buy a CFD, you don’t actually own the underlying asset, nor do you need to.
Unlike buying a stock, where you only make profits if prices go up, you can take both long and short positions using a CFD, generating profits when prices go up or down respectively. UOB Kay Hian offers a wide range of CFDs, including CFD Equities (for stock trading), CFD Indices (for indices trading) and CFD 10.
CFD 10 is a unique product exclusive to UOB Kay Hian allowing investors to trade CFD Equities using leverage on a short-term basis. It offers interest-free financing and lower margin requirements for the first 10 calendar days, while also providing you with leverage of up to 10 times. So, if you intend to take on a short-term trading position with a small capital outlay, the CFD 10 can be an ideal investment instrument, rather than requiring a bigger outlay to own the stock.
For example, if you were to invest $5,000 in SingTel, you can take a long position worth up to 10x your investment or $50,000. After 10 days, if SingTel’s share price rises by 5%, your profit would be $2,500, before brokerage fees and charges. This translates to approximately 50% in returns as compared to 5% in returns when using traditional equities. However, it’s important to remember that if the trade move against you, the opposite will also apply. This means your losses will be greater because of the use of leverage.
If you intend to hold onto the CFD 10 position for a slightly longer duration (up to a maximum of 30 calendar days), daily interest charges will start to apply from the 11th calendar day onwards.
So, if you are a contra trader who would like to extend your T+2 contra period or a short term trader who would like to make more efficient use of your capital at zero-interest financing, you can take advantage of the CFD 10 product offered by UOB Kay Hian.
Regardless of what assets you choose to invest in, you need to always remember to use the right instruments (be it investing in equities or CFDs) based on your investment objectives.
UOB Kay Hian 50th Anniversary Promotion
Incorporated in 1970, UOB Kay Hian turns 50 this year. To celebrate this milestone, the firm is running a 50th Anniversary Promotion, where you stand a chance to win a grand prize of S$50,000 when you invest in eligible products offered by UOB Kay Hian from now till 31 July 2020.
Besides investing in equities, ETFs, and CFD products, other eligible investment products that you can consider include Daily Leverage Certificates, Margin Trading, Unit Trusts and its robo-advisory products.
You can find out more details about the promotion here. In addition to the grand prize, monthly draws will also be held until June 2020, where a lucky winner will win S$2,000 each month. And if you invest in selected ETFs from now till 30 June, you get 5x chances in the Lucky Draw!
Whether you fancy yourself as a short or long-term investor, a UOB Kay Hian account offers a holistic suite of investment instruments. For those new to investing or to UOB Kay Hian, opening an account can be done easily online from your home without the need for any face-to-face interaction.