Read fine print, be mindful of risks

Read fine print, be mindful of risks

Derivatives used to be a no-go area for retail investors and with good reason, given their complexity, but the tide is turning fast with trading volumes soaring.

The Singapore Exchange's derivatives trading business has continued to grow steadily over the past few months, with daily trading volumes up 8 per cent last month from July.

One attraction of derivatives is that little capital is required.

For as little as $200, depending on the instrument, investors can take a position of as much as $10,000, said Mr Justin Harper, market strategist at contracts-for-difference provider IG.

Many people investing in derivatives or products that contain them tend to be more sophisticated investors, such as high net worth individuals or family offices which manage the wealth of rich families.

But with greater public awareness of the potential gains, more retail investors are attracted as well.

Mr Goh Nai De, 25, an undergraduate at Singapore Management University, said he was introduced to derivatives in late 2007 by his retiree uncle.

Since then, he has made a "comfortable" five-figure sum trading them, he said.

Another reason derivatives and related products are becoming popular boils down to one word - flexibility.

Derivatives allow investors to make bets and profit even if the market goes down, notes Ms Grace Chan, director of sales and marketing at Phillip Futures.

In contrast, an investor who buys stocks profits only when the price rises.

The investment environment is growing increasingly complex as financial institutions introduce new products that aim to give investors more room to manoeuvre when times are tight.

"In instances where valuations have been more depressed, the (market's) volatility often allows us to introduce products which provide clients both upside and some downside protection," said Ms Tan Su Shan, managing director and group head of wealth management at DBS Bank.

But to avoid taking on risks they are unaware of, investors need to read the fine print.

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