Global Trader sees potential in Thailand

Mention derivatives and most people are all at sea about what they mean and how to go about investing in them. Those who do know about derivatives believe they’re best left to very sophisticated investors.

Global Trader is a company that offers retail investors access to financial market products that normally are the province of institutional investors, says Fleur Gremmen, the company’s chief executive officer.

The company has set up a branch in Thailand with the approval of the Securities and Exchange Commission (SEC), but its expectations are modest for the moment.

The SEC only allows derivatives to be distributed to professional investors. As well, Global Trader has to consult with the Bank of Thailand to see whether it will be possible for local investors to gain access and trade in overseas assets.

But market rules change and in the future the average investor might gain access to these high-risk products.

“A derivative means nothing other than a product that is derived from a standard product,” explains Ms Gremmen. “Often you have two types of derivatives. One is a product that is traded on the exchange, for example a future or an option.

“So a future is a forward contract that is derived from a share or a basket of shares if it’s an index, and an option is a contract that gives people the right but not the obligation to purchase an underlying share at a certain value. Those are the exchange-traded derivatives”

What Global Trader offers is a non-exchange traded derivative called a contract for difference (CFD) which gives the purchaser the economic exposure to any asset – possibly a stock, an index, a currency or a commodity – but it does not actually transfer that asset to the individual.

Ms Gremmen gives the example of buying a house. If there is a house on the market for a million baht, if you pay that one million baht you get the house. Or you can get a mortgage from the bank to buy that million-baht house by putting up 100,000 baht in equity. The difference is that if the house’s price rises from one million to 1.5 million baht, even with a mortgage you profit 500,000 baht.

“It’s the same thing with a contract for difference, so you are essentially saying to Global Trader, ‘Can you finance the purchase of a million baht worth of stocks?’ But when the stock price goes up you are the full owner of that 500,000 baht if that’s the profit the stocks realise.”

With a future, the difference between the price now and in the future is the cost of funding, and the interest that would normally apply gets added.

However, CFDs are based on today’s price. “The only difference is that you’re only paying a small sum, a 10% down payment, and you have full upside to the entire exposure if the market goes up.”

Also with a future, one is obliged to buy the stock at the forward price but with a CFD there is no real obligation. “It’s just saying that rather than purchasing the stock now you are making a down payment on the stock, so whatever the economic performance of the stock, you have the right to that performance. The stock never comes into your ownership.”

Derivatives have only been allowed in Thailand since January 2005 and Global Trader is the first international firm to receive a derivatives licence from the SEC.

“We are going to be distributing not all derivative products but essentially futures and CFDs to Thai investors and also using Bangkok as an operating and trading hub for the rest of the Asian region,” Ms Gremmen says.

“The Thai SEC has become quite progressive by officially recognising derivatives and regulating them, which protects us from other sort of cowboy outfits from coming into the market and starting to sell a product when they don’t really what they are doing. Our company is globally regulated in London by the FSA (Financial Services Authority), which is essentially the strictest regulator in the world.”

Ms Gremmen acknowledges – and the Global Trader website is very clear on the point – that derivatives are for adventurous investors.

The mistakes that less experienced investors make with CFDs include moving the stop-loss further. Global Trader advises people that as they are only paying a small margin – 10% – for the purchase a stock, if that 10% gets eaten up because the stock’s price drops 10%, one should stop there, but what people generally do is move the stop position further.

“If the price was 10 baht, and the client has a CFD, then the price goes from 10 to 9, rather than taking a loss at 9 and losing 10% of the value they say, ‘Oh no, let’s move it to 8, 7, 6 – by the time it goes to 5 they’ve lost half their total wealth.

“There is a saying, ‘plan your trade and trade your plan’, so if you plan your trade to only lose 10% then you must stop when you have lost 10%, don’t allow it to go to 20, 30, 40 or 50%.”

In any case, misusing the leverage one has is a serious mistake. Ms Gremmen returns to her house example:

“Tell people you can get a mortgage, they say, ‘Fantastic, I don’t want to buy one house, I want to buy 10 houses.’ The problem is, when the property market collapses you’ve not only lost one house but 10 houses, or the equivalent value thereof. You must never, even with leverage, invest more than you could lose.”

Tags: CFDs, Global Trader

This entry was posted on Monday, October 16th, 2006 at 4:23 am and is filed under Industry Happenings. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.