bear market on stock exchange

How to short stocks in Singapore

Alvin Chow
Alvin Chow

As the stock market has officially entered the bear territory, some investors are thinking of shorting the market to make money on the way down.

Most investors are long-only, which means buying stocks to profit when the share prices go higher. Hence, they are unfamiliar to make money on the short side, which is to sell stocks that you don’t have and buy them back at a lower prices subsequently to make a profit.

Shorting is not just the opposite of going long. It is more complex and hence we need to explain the ways to short stocks in this article.

Why not short stocks directly?

It is not advisable to short stocks directly because it has a lot of restrictions. First, you need to indicate the trade is a short sell when you make the trade. Second, you need to close the short sale by buying back the stocks within the same day. Failing which, you will need to borrow shares in order to stay short beyond one day. You will be forced to buy it back at an unfavourable price and pay additional fees if there are insufficient scripts to borrow. Here’s what Monetary Authority of Singapore (MAS) has to say:

In Singapore, the Central Depository (Pte) Limited (“CDP”) mitigates short selling’s potentially disruptive effects on the settlement system, by purchasing securities on behalf of sellers who do not possess securities for delivery on settlement day (commonly referred to as the “buying-in” process). Where CDP carries out buying-in, the cost of purchase and an additional penalty is charged to the seller who failed to deliver the securities.

Refer to the guidelines for short selling.

Shorting SGX-listed stocks involve a lot of headaches and fees. So don’t short stocks directly. Below are better ways to short the market.

Contracts For Difference (CFDs)

Contracts For Difference or CFDs have been a very versatile and simple enough instrument to execute all the trading ideas, from stocks to commodities to cryptocurrencies even.

CFDs are unlisted derivatives (not traded on the stock exchange). You can have CFDs on STI, DBS, SingTel or any stocks that your CFD broker provides. When you buy or sell CFDs, you enter into contractual obligations with the broker and you do not actually own the underlying assets the CFDs are tracking. And your gains and losses are settled based on the price differences between the opening and the closing values of the contract.

Unlike stocks, you can hold short CFDs without restrictions. There’s no time limit nor there are admin fees for shorting. This is where the convenience of shorting comes about.

Another advantage is that the commissions for stock CFD trading are generally lower than stocks. It can be 0.10% with a minimum of $10-$15, while Singapore stocks are around 0.28% with a minimum of $25. Commissions are competitive and there are brokers who offer comparable commissions even for stocks and the differences between stocks or stock CFDs are narrowing.

You can also short a Singapore Index CFD instead of specific stock CFDs. Index CFDs usually have zero commissions!

The CFD brokers will make some money from the price spreads. Hence the spreads can be wider than the actual spreads of the underlying assets. Think of it like your money changer. They don’t charge you a commission but they make a little off the bid-ask spread they quote you.

It is important to note that CFDs are leveraged products. That means your gains and losses can be amplified. Hence they may not be suitable if you do not want to take leverage. You have no option not to take leverage.

Financing charges will also be applied when you hold the CFD contracts more than 1 day. The typical financing charges for long positions are 2.5% p.a. plus the interbank lending rate, annualised. The good news is that the financing charges are lower on the short positions because you pay 2.5% p.a. minus the interbank rate. The financing charges differ among brokers so be sure to check this out as it is one of the main trading costs in CFDs.

As with all margin products, you can lose more than what you put in. You may receive a margin call when the market moves against your position too much. You will then have to top up more cash to keep your positions. Otherwise, the broker would force close all your positions and incur the losses.

The last thing you should know is that you need to pass the Customer Knowledge Assessment (CKA) in order to trade CFDs. This is to make sure you know what you are getting into.

Pros

  • Easy to short and just need to settle the price differences as gains or losses.
  • Slightly lower commissions for stock CFDs.
  • No commissions for index CFDs.
  • Financing for short positions is lower than for long positions.

Cons

  • Leverage and financing charges are compulsory.
  • Not all counters can be shorted. Offerings can differ among brokers.
  • Bid-ask spreads can be wider than the actual spread of the underlying asset.
  • Need to pass Customer Knowledge Assessment (CKA).
  • You can lose more than what you put in – you need to top up more money once you hit a margin call.

Here’s a list of stock CFD Providers in Singapore, NOT in order of preference:

Daily Leverage Certificates (DLCs)

Daily Leverage Certificates or DLCs are listed and traded on SGX. This gives transparency to their pricing and tighter bid-ask spread. DLCs are derivative contracts on indices and stocks.

The nomenclature of a DLC is quite simple to interpret. The direction is explicitly displayed – Long or Short. For e.g., DLC SG5xShort DBS, you will interpret as shorting DBS at 5x leverage. So in order to short the market, you BUY a short DLC and not SELL a short DLC!

Here’s a list of Short DLCs on Singapore Index and stocks available at the time of writing:

  • -7x MSCI Singapore Free Index
  • -5x SINGAPORE AIRLINES
  • -5x DBS GROUP HOLDINGS LTD
  • -5x ASCENDAS REAL ESTATE INV TRT
  • -5x OVERSEA-CHINESE BANKING CORP
  • -5x UNITED OVERSEAS BANK LTD
  • -5x VENTURE CORP LTD
  • -5x WILMAR INTERNATIONAL
  • -5x GENTING SINGAPORE LTD
  • -5x SINGAPORE EXCHANGE
  • -5x CAPITALAND LTD
  • -5x KEPPEL CORP LTD
  • -5x CITY DEVELOPMENTS
  • -5x YANGZIJIANG SHIPBUILDING

The selection centres on the more well known stocks in Singapore and you can see the options are limited. CFDs on the other hand offer a wider selection.

DLCs are leverage products too. They range from 3x to 7x leverage on the daily price movement on the underlying asset. A 1% gain/loss can be magnified to a 7% gain/loss with a 7x DLC.

Currently the financing cost is pegged to 12m HKD HIBOR. The total financing costs including a rebalancing cost would amount to less than 2% p.a. at the time of writing.

DLCs differ from CFDs in terms of fees is that the former have additional hedging fee of about 3.4%.

This sounds like higher fees than CFDs but you do not need to pay most of them if you buy and sell within a day. See the table below:

Hence day trading fees for DLCs can be lower.

There’s a compounding effect for DLCs when held overnight. This means that you can make more money if the market moves in your favour in consecutive days. But you can make less/lose more if the market is volatile. It is hence better to use DLC for day trading and close your short position within the day.

You can refer to this post if you want to understand the mechanism.

There’s one superior advantage of DLCs – there’s no margin call. You can only lose what you have put in and not more.

Moreover, being a listed product means you can do contra trading – you can buy a DLC contract and close it within 3 trading days without putting up any cash upfront!

You need to pass the Customer Account Review (CAR) in order to trade DLCs.

DLCs are listed on SGX so you can use any broker that has access to SGX market to trade them.

Pros

  • Excellent day trading instrument.
  • Tight bid-ask spreads.
  • You only lose what you put in and there’s no margin call and no margin requirements to maintain.
  • Pricing is consistent for all participants because DLCs are traded on the stock exchange.
  • Contra-trading allow – don’t need to have cash upfront to trade.

Cons

  • Additional hedging fees when DLCs are held overnight.
  • DLCs have compounding effects on a daily basis and hence losses can be amplified if held over a long period.
  • Need to pass Customer Account Review (CAR).
  • Limited selection of stock DLCs.

Structured Warrants

Warrants can be used to short the market but I would say this is the most complicated way to do so. This is because warrants have several factors that affect their pricing such as strike price, volatility and time decay.

If you have traded options before, warrants are similar. In this context, we are referring to the structured warrants and not warrants issued by companies. Structured warrants are derivatives created by financial institutions for trading purposes and there’s no conversion to actual shares of the underlying securities. You would also need to pass the CAR in order to trade them.

Warrants have two directions – call and put. Buy put warrants to short. Here are some of the available put warrants on Singapore counters at the point of writing, and unfortunately, there are even fewer choices than DLCs:

  • DBS MB ePW201229 (B83W)
  • OCBC Bk MB ePW201228 (NJBW)
  • UOB MB ePW201228 (INXW)
  • STI 2400MBePW201231 (VK2W)

Personally I see warrants as a good way to hedge rather than to express a short bias. This is because of the complexity, you need to get a lot of things right in order to profit from it. A plain vanilla short with CFDs or even DLCs is often easier.

Warrants are good for investors with larger portfolios who want to hedge against the downside. Warrants can work like an insurance. You pay a premium to get a payoff when something happens. Similarly you can pay a premium to own a put warrant and you get a payoff if the underlying security crashes.

For example, I can constantly buy a put warrant on the STI if I have a lot of Singapore stocks. If the Singapore stock market crashes, I would make money from the warrants and defray the losses in my stock holdings. Most of the time it doesn’t happen but a huge payoff can happen because warrants have exponential payoff.

You can refer to the guide to structured warrants produced by SGX to understand more about the product.

Similar to DLCs, you won’t lose more than what you have put in. There’s no margin call.

Structured warrants are listed on the SGX too and you can use your usual brokerage to buy and sell them.

Pros

  • Best for hedging a portfolio of stocks. More useful for investors than traders.
  • Returns can be exponentially rewarding.
  • You won’t lose more than what you put in. No margin call.

Cons

  • Most complex shorting instrument with numerous factors to consider.
  • Limited selection of underlying securities.
  • Need to pass CAR in order to trade.

Conclusion

It is not advisable to short stocks directly because of restrictions such as closing your short position within the same day, or having to borrow scripts to maintain your short position over a longer period. Hence, it is better to use CFDs, DLCs and Structured Warrants.

They are leverage derivatives and are more complex than plain vanilla stocks. You are required to pass the Customer Account Review (CAR) and Customer Knowledge Assessment (CKA), depending on the instrument you are trading.

CFDs are good for holding short positions over a period of time while DLCs are better for day trading. While traders may prefer CFDs and DLCs, investors may use structured warrants as a hedging tool for their stock portfolio.

Be sure that you know what you are doing when using any of these instruments to short. We recommend you to learn from Robin on how to trade the markets before jumping in with short positions.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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