CFD Trading in Malaysia – A Beginner’s Guide

Contracts for difference (CFD) trading can give you exposure to virtually any financial asset. With CFDs, you can trade stocks, bonds, forex, cryptocurrency, commodities, and more. The key to CFD trading is that you don’t own the underlying asset, but still get financial exposure to it. This can make it easier and more affordable for beginners to get into trading.

Sound interesting? In this guide, we’ll cover everything you need to know about CFD trading in Malaysia. Not only do we explain the basics of CFD trading, but we also review the best CFD brokers and take you through you can get started trading CFDs today.

How to Trade CFDs in 3 Quick Steps

Want to start trading CFDs in Malaysia right away? You can place your first trade with these three steps:

Step 1: Choose a Malaysia CFD Trading Platform

In order to trade CFDs in Malaysia, you’ll need a CFD trading platform. There are many on the market, but choosing the right one can be tough. To help, we’ve reviewed five of the best CFD brokers operating in Malaysia today.

Step 2: Learn How the CFD Trading Market Works in Malaysia

Before you can dive into CFD trading, it’s important to understand how the market works and the associated risks. Let’s take a look at how CFD trading works in Malaysia.

What is CFD Trading?

CFD trading involves trading contracts to buy or sell an asset at an agreed-upon price. If the price of the asset rises, your profit is the difference between what price you bought the asset at and the new, higher price. In this sense, trading CFDs give you the same exposure to the price of an asset as buying an asset outright.

But when you trade CFDs, you don’t actually own the underlying asset at any point. So instead of owning the underlying asset like when you buy Bitcoin or buy stocks, you’re simply speculating on the price. Much of the forex trading that takes place online is also done via CFDs in order to avoid conversion costs. CFDs remove much of the logistical and legal hassles that can be associated with owning foreign currencies or cryptocurrencies outright brings logistical and legal hassles that don’t exist with CFDs.

One of the major ways in which CFD trading differs from some traditional forms of trading is that it allows you to go short, meaning you can speculate on the price of an asset going down as well as up.

Another thing to consider when trading CFDs in Malaysia is that you can trade with leverage. Essentially, can be used to make larger trades by borrowing capital from your broker. For example, a 1,000 ringgit trade is worth 10,000 ringgit if you apply 1:10 leverage.

While some brokers offer users the chance to both buy assets and trade CFDs, many are CFD-only. You should keep in mind that when trading CFDs, you won’t be eligible for things like dividend payouts from stocks.

Is CFD Trading Halal?

A major question many Muslims face is whether CFD trading in Malaysia is Halal, or allowed by Islam. CFD trading is not considered halal because you don’t own the underlying asset in order to make a profit. In Islam, this is considered as Riba, which is strictly prohibited by the religion. Leveraging your position to increase your potential profits is also not allowed by Islam.

That said, you can avoid breaking any tenets of Islam by using a swap-free CFD trading account. With a swap-free account, your broker doesn’t charge you any fees for holding positions overnight or require any commissions. Since you are not paying for the service in your account directly, you are not taking part in Riba.

Is CFD Trading Legal in Malaysia?

Yes, CFD trading is legal in Malaysia. Brokers are regulated by the Securities Commission Malaysia (SCM), which was established in 1993 by the Securities Commission Act. This regulatory body reports directly to the Minister of Finance. In April 2018, the SCM issued new regulations to govern CFD providers in Malaysia.

To verify authorization from the SCM, check the bottom of a trading platform’s homepage under disclosure text for the relevant registration number.

What Regulations are in Place for Buying CFDs Shares in Malaysia?

The SCM put new guidelines for Malaysia CFD brokers into place in April 2018. These regulations set out how much leverage Malaysian CFD traders can apply when trading different assets, such as shares, forex, and commodities.

They also lay out what types of assets, and particularly stock shares, can be traded through CFDs in Malaysia. Specifically, any company that lists on an exchange outside of Malaysia must have a market cap of at least MYR3 billion for its shares to be traded with CFDs.

What Risks are Involved with Buying CFDs in Malaysia?

Trading CFDs can bring profits, but it also carries some risk. It’s extremely important to understand the risks of CFD trading in order to avoid losing money with this derivative.

Market Risk

CFDs are derivative assets that you can use to speculate price movements of underlying assets such as stocks. If you believe the price will increase, you go long. You should go short if you believe the price will drop. You predict and hope the price will move in the direction that will offer you gains. However, no matter what your experience level is, the unexpected can always happen.

Because of the nature of CFDs, and particularly leveraged CFD positions, small changes in price can have significant impacts on the value of your position. For example, at 10:1 leverage, a 1% drop in the price of an asset can mean a 10% loss for you.

Furthermore, if your position begins to lose money, your broker may ask you to deposit more money in your trading account to cover the required margin. This in turn may force you to close your position and sell at a loss.

Counterparty Risk

The counterparty is the entity which offers you tradable assets.

In CFD trading, you don’t own the asset underlying the derivative—only the contract itself. Counterparty risk occurs if the CFD provider is a market maker and fails to fulfill its financial obligation. In such a circumstance, your contract essentially becomes worthless because there is no way to redeem it. This is why you need to make sure you only use licensed and regulated CFD brokers.

Liquidity Risk

If there is low liquidity for an underlying asset, your CFD broker can require you to deposit more money to meet your trade margin. In addition, since the financial markets move very fast, the price of a CFD can fall before your trade is executed at the specified price. This is known as gapping and means that you may earn less profit than you thought you would from a trade.

Step 3: Learn CFD Trading Strategies 

The key to CFD trading in Malaysia is to approach it with a well-developed strategy. There are many different strategies, each with their own complexities, strengths, and weaknesses. To help you get started, we’ll take a look at four of the most popular strategies you can use for trading CFDs.

Swing Trading Strategy

Swing trading is a strategy that aims to identify changes in the momentum of an asset. When a stock, for example, rebounds from a recent low, swing traders will buy that stock and profit while it has high upward momentum right after the bounce.

When swing trading, it’s important that you identify support and resistance levels for an asset of interest using a variety of technical indicators. Most swing trades occur over a few days to several weeks, or as long as strong price momentum lasts.

Hedging

Hedging is a trading strategy meant to cushion you from the risk of adverse price fluctuations against an open trade. Essentially, you can bet against your trade, either by selling CFDs for the same asset or buying CFDs for an asset that tends to move in the opposite direction from the one you are currently invested in. Hedging is good for protecting one of your open positions from a potential market crash, among other things.

Short-term Trading vs. Long-term Trading

Short-term trading attempts to capitalize on changes in price that happen over seconds or minutes, while long-term trading looks for profits on the scale of weeks or months. It requires a lot of discipline and you must keep up-to-date with the financial and political environments. This strategy is action-packed and you will be highly active in the market throughout the day.

Long-term trading requires patience above all else. You will buy and hold a CFD and wait for the opportune moment to sell it. When long-term trading, be sure to use stop losses to protect against a significant loss.

Breakout Strategy

To trade breakouts, you first need to identify a key price point for the underlying asset you want to trade. When the price breaks above or below this price level, it will often make a large move in either direction soon after. So, you can buy or sell CFDs to take advantage of this volatile price action.

When using this strategy, avoid trading when the market does not offer clear signals. It is generally much better to miss an opportunity than to lose money when you cannot tell the direction of a trend with certainty.

Step 4: Open a CFD Trade

Ready to get started with CFD trading in Malaysia?

To get started, you just need to open an account with one of the brokers we reviewed above.

Choose the one that best suits your needs – the registration process should be swift.

Pros and Cons of CFD Trading

Conclusion

CFD trading in Malaysia offers a way to access global markets for shares, forex, commodities, and cryptocurrencies, all without the hassle of owning these assets outright. Short-term investors may be able to profit from trading CFDs, while long-term investors can use these derivatives to build a diversified portfolio. With the ability to go short and apply leverage, CFDs open up a whole new world of trading opportunities.

Resources

To ensure we bring you the most reliable and accurate information possible, our writers use primary sources to support their content. These include studies, government resources and commentary from industry experts.

• Securities Commission Malaysia. “Guidelines on Contracts for Difference.” https://www.sc.com.my/api/documentms/download.ashx?id=51c97330-3721-4d50-9f28-374f582d3164. Accessed June 8, 2020.
• Bank Negara Malaysia. “Framework for Electronic Trading Platforms.” https://www.bnm.gov.my/index.php?ch=57&pg=150&ac=859&bb=file. Accessed June 8, 2020.

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