Simplifying daily leverage certificates

What Are Daily Leverage Certificates (DLCs) and Why Trade Them with Us?

Daily Leverage Certificates (DLCs) are financial instruments that are classified as highly complex and high-risk products where investors can gain (or lose) big.

They offer a fixed leverage factor – meaning, if the underlying asset moves by a certain percentage, the DLC moves by multiple times that amount — be it up or down.

Note that the most an investor can lose is the initial amount they invested.

Since July 2017, SGX is the first and only exchange in Asia to offer DLCs for trading on its exchange to date. Trading DLCs in Singapore is just like buying and selling shares on SGX. You can place trades through your broker without needing a separate account.

How Do DLCs Work?

DLCs can expand your returns by offering fixed leverage — up to 7 times — on an underlying stock or index. You can choose to go long (if you expect prices to rise) or go short (if you expect prices to fall), making it a flexible tool for trading in any market condition. There are no complicated margin requirements

Here’s an example of how leverage works -If you buy a 5x Long DLC on a stock, and the stock rises 2%, your DLC would gain 10% (5 times the movement). But if the stock falls 2%, your DLC would lose 10%. The same applies to Short DLCs, which gain when the market drops and lose when it rises.

Just like any high-risk investment, the returns (or losses) can be high too.

In the case of DLCs, there is an airbag mechanism designed to limit extreme losses during periods of high market volatility. This airbag mechanism activates only when the underlying asset moves in the opposite direction of the DLC. However, it will only be triggered during the trading hours of the stock exchange where the underlying asset is listed.

Why Trade DLCs on the SGX?

DLCs offer a simple and easy way for investors to trade with leverage.

Here’s why some investors find them attractive:

Easy Access for Retail Investors

DLCs trade like regular stocks on SGX, so anyone qualified to trade Specified Investment Products (SIP) can invest using a brokerage account with access to SGX.

Lower Capital Requirement

Gain exposure to major stocks / indices with lesser upfront investment compared to investing in the stock directly.

Boost Short-Term Trading Potential

With leverage of up to 7 times, investors can maximize opportunities in rising or falling markets.

While Daily Leverage Certificates (DLCs) can offer expanded returns, they also come with significant risks. If you’re considering investing in them, it is important to be aware of the risks.

Trading Risks with DLCs You Should Watch Out For

Leverage Risk

DLCs exponentiates your profits and losses due to leverage. This means, all profits/losses are amplified. For example, a decrease in the price of the underlying index will lead to a larger loss in the value of long DLCs based on the leverage multiplier, while short DLCs will result in magnified gain.

Market Volatility Risk

Markets can be unpredictable and DLCs react strongly to price swings. Just like the stocks, DLCs are also impacted by events that affect its demand and supply, which will affect the value of your investment.

Liquidity Risk

Liquidity risk can happen when there are insufficient matching orders for DLCs which would make it difficult for individuals to buy or sell whenever they want.

Currency Risk

Take note that should a DLC be denominated in a currency other than the Singaporean Dollar, investors will be subjected to exchange rate fluctuations. This could potentially have a negative impact on the investor’s returns from the DLCs.

Complexity Risk

DLCs are highly complex instruments – that is why investors need to be qualified to trade Specified Investment Products (SIP). Investors need to fully understand the benefits and the risks before taking the first step investing in this high-risk instrument.

Tips on How to Get Started with DLCs

Want to jump straight into DLCs but don’t know where and how to start? Here are some tips on your potential first step:

Research, Research, Research

It’s important to know your stuff. Research and be informed about DLCs – from the characteristics to the potential and risks involved.

Choose a Trusted Platform / Broker

Investors trade DLCs through an investment platform or broker. Which is why it is important to ensure you use a trusted platform such as Standard Chartered for this highly complex and high-risk instrument.

Start small

Remember that investors can lose the entire invested amount when it comes to DLCs. That’s why starting small – which can be as low as single digits, depending on the value of the DLCs — might be a good idea if you want to play it safe and gather more experience before committing bigger.

Investors of DLCs must be qualified to trade Specified Investment Products (SIP)

It’s important to note that investors of DLCs must be qualified to trade Specified Investment Products (SIP). This ensures they have the necessary knowledge and understanding of complex financial instruments before investing.

Could DLCs Be Right for You?

DLCs offer investors exploring opportunities outside the normal vanilla stocks. With the potential for amplified gains, it can be utilized efficiently for those who understand the risks and want a diversified portfolio.

However, they are not suitable for everyone, especially those who are risk-averse or unfamiliar with leveraged products.

If you’re confident in your investment knowledge and ready to explore DLCs, now is the time to take the next step.

Ready to start trading DLCs?

Disclaimer

This article is for general information only and it does not constitute an offer, recommendation or solicitation of an offer to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This article has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice or an investment recommendation. It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person or class of persons. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product or invest in an investment. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product or service described herein is suitable for you.

You are fully responsible for your investment decision, including whether the investment is suitable for you. The products/services involved are not principal-protected and you may lose all or part of your original investment amount.

Standard Chartered Bank (Singapore) Limited will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of information in this article.

Singapore dollar deposits of non-bank depositors are insured by the Singapore Deposit Insurance Corporation, for up to S$100,000 in aggregate per depositor per Scheme member by law. For clarity, these investment products are not deposits and do not qualify as an insured deposit under the Singapore Deposit Insurance and Policy Owners’ Protection Schemes Act 2011. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.

The information stated in this article is accurate as at the date of publication.