Do you know that you can leverage on the Straits Times Index (STI) with two different approaches?
Trading and investment are two sides of a coin yet they aim to maximise profits from the financial markets.
Before we look more in-depth into the approaches, let’s understand what STI is:
“The FTSE Straits Times Index (STI) is a capitalisation weighted stock market index that is regarded as the benchmark index for the Singapore stock market. It tracks the performance of the Top 30 companies listed on the Singapore Exchange.” – Wikipedia.
STI is an index fund that is popular among retail investors because of its simplicity.
As a normal investor, you do not need a brokerage account or deposit to purchase a portion of the index. Instead, you can simply approach your bank to ask about the transaction.
An index fund is different from an ETF (Exchange Traded Fund) in many aspects.
One of the differences between the two is the dividend policy. Index funds invest their dividends immediately while ETFs retain the earnings until the company distributes its dividends among the stakeholders at the end of each quarter.
STI as an investment
Investments occur when you wish to hold on to a financial instrument for over a period of time and gain your wealth through reinvesting.
As a retail investor, time is on your side.
You prefer to ride out market fluctuations and are more concerned with market fundamentals such as price or earning ratios and management forecast.
Hence, STI is probably a good index to look at as part of your portfolio.
STI is an index consisting of the top 30 companies and it selects the 30 companies based on their size, valuation and liquidity.
If you are a new retail investor, you probably would have heard of this index as the “sampler” of all the top stocks in the Singapore market.
Through this investment, you can minimise your risk as you get a hold of what is happening in the market and identify potential stocks that you can buy in the future. .
If you are a more advanced investor, you can also use it as a hedge for your portfolio.
STI as a trade
Trading takes place when you wish to buy and sell a financial instrument quickly because you hope to gain more returns than the buy-and-hold investing method.
As a trader, you are prepared to take a higher risk for potentially higher returns. Such returns can be as high as 10% per month as compared to 10% per annual returns from investing.
You need to be experienced in technical analysis tools and determine the best time to buy low and sell high easily.
It is an interesting time for traders and even for those who are considering investing in Singapore as IG Singapore has recently introduced a new product called the Singapore Index CFD.
This product allows traders to trade on STI with the freedom to buy long and sell short with a CFD (Contract For Difference).
The advantage of trading STI with a CFD is the opportunity cost. In a CFD, you are viewed as a borrower and you can trade STI with a smaller amount of your fund or borrowed fund.
Under a normal circumstance, it can be difficult to trade with STI directly as it is a large index that requires a lot of funds. Thus, CFD can be a friendly tool for traders who do not wish to focus their funds on STI alone.
Additionally, the trading charge incurs on a daily basis and is marked to the market price when the market closes as compared to per trade charge. This makes the trading costs competitive against other financial instruments.
As STI is relatively stable, it can be your hedging tool for your other investments especially when you expect the market to be volatile in the next few months.
The million dollar question: How should I approach STI?
Ask yourself these questions:
- How long can I hold my funds in place? How long am I willing to wait?
- Can I bear the associated costs from each approach?
The two approaches have both pros and cons in their own ways.
Look at your comfort zone, your commitment level and the funds that you can afford to risk before you decide. It is also important to understand that profits come with risks and preparation.
Hence, it may be wiser to consider both investment and trades if you can afford. A diversified portfolio can help you work towards your financial independence in the long run.