April 10

Daily Leverage Certificates – How Does It Work And How Can You Use It To Your Advantage? (Part 1)

It’s a wrap!

The past weeks have been exciting as it was my 1st time moderating in the Singapore Trading Festival, organized by SGX and EquitiesTracker. Thanks for attending the event!

There’s no prize in guessing which instrument was brought up in the session I moderated.

Yes, the instrument Daily Leverage Certificates (DLCs), was mentioned and explained briefly, and I’d like to elaborate further as I find DLCs to be a highly beneficial instrument for short-term trades like you and I.

Are you ready to find out more about this interesting instrument?

What Is A DLC?

A DLC is a derivative financial instrument that’s listed on an exchange (eg. Singapore Exchange in Singapore). Its underlying asset can be an index or single stock from Singapore and Hong Kong. US indices were recently introduced too!

DLCs offer a fixed leverage (eg. 5x and 7x) the daily performance of the underlying asset. In the situation that you’ve bought a 5x DLC on the Hang Seng Index (HSI), a 1% price movement in HSI will result in a price movement of an approximate 5% for your DLC on a close-to-close basis.

Traded on SGX Securities Market, the DLCs are not margined products. Hence there’s no risk to getting a margin call and you can’t lose more than your invested capital.

In Singapore, DLCs are issued by Societe Generale and you can invest in DLCs through your regular stock brokerage account.

How Does A DLC Work?

As DLCs provide you with a leveraged exposure to an underlying asset, your profit and loss are multiplied by the same factor. Eg. A 7x DLC will bring you a 7x profit or loss.

Are there different types of DLCs?

Yes! There are 2 types of DLCs – a Long DLC and Short DLC.

You’ll purchase a long DLC when you are optimistic of the underlying asset. This is because when the price of the underlying asset rises, you’ll make money.

On the other hand, when you anticipate that the price of the underlying asset will fall, you’ll purchase a short DLC to profit from the decline in prices.

Do you notice something? DLCs work well in markets where prices are trending.
And if you need help to read price trends, here’s how you can read trends in under 5 seconds!

If you keep your DLC position for more than a trading day, your profit and loss will be compounded. Here’s an example:

If the price of the underlying asset rose by 2% for 3 consecutive days (ie. a 6% gain in total), the 5x long DLC will generate a return of 33% (ie. more than 5 times of the 6% gain on the underlying asset). That’s because the gains are compounded each day!

Before you get too carried away, the compounding doesn’t work so well in a sideways market, so you’ll want to be more careful.

Understanding the summarized version of how a DLC works, how can you use DLCs to your advantage?

How Can You Use DLCs To Your Advantage?

If you have a short term view on the underlying stock or index then the DLCs can provide you with a few advantages:

#1 Leverage

As cliché as it sounds, leverage is a double-edged sword so you have to be able to manage your risk.

If you’re able to do so, leverage can open up many trading opportunities for you especially in lower time frames.

Since Singapore stocks don’t move much within a day (usually 1-2% a day), you can increase your potential return to 5-10% a day by using DLCs!

As with leverage, your losses can be amplified t0 5-10% if you get the direction wrong. So, it’s always important to position size and manage your risk when trading with leverage.

#2 Use Less Of Your Capital

DLCs are priced around S$0.20 to S$2 from my quick scan which means that DLCs offer you exposure to the underlying asset at a fraction of the cost of buying the actual stock.

For example, to gain exposure to Tencent stock, you could use the 5x Long DLC on Tencent that’s currently priced around S$1.30 and you can buy them in increments of 100 units. This beats buying the Tencent stock for ~HKD39,000 or ~SGD7,000 (Tencent stock price of HKD390 x Minimum lot size of 100 units) if you intend to slowly average into Tencent or intend to put less than SGD7,000 in Tencent.

#3 Gain Exposure To Hong Kong Stocks Here In Singapore

Talking about Tencent, the DLCs offer exposure to a wide range of Hong Kong stocks.

Better still, DLCs are traded on SGX and in Singapore dollars so you don’t need to worry too much about the fees on Hong Kong Exchange or changing your money to HKD. Sounds pretty convenient to me since most of us already have access to buy Singapore stocks one way or another.

Your next step is to learn to read the names of DLCs.

How To Read A DLC Name?

Let’s learn how to read a DLC name.

From the example above, the 1st 4 alphabets DVIW is a unique code assigned by SGX for their reference. This code could be made up of alphanumeric symbols too!

Next, you’ll see the counter that’s the underlying asset of the DLC. It could be a stock that’s listed on the Hong Kong or Singapore stock market or even the S&P 500 index.

To the right of the underlying asset is the leverage factor. The leverage factor is usually 5x or 7x.

The type of DLC will be displayed next, showing you if it’s a long or short DLC.

Beside the type of DLC, you’ll see the issuer of the DLC. SG doesn’t stand for Singapore in this case. SG stands for Societe Generale.

And lastly, you’ll see 6 numbers in the format of YYMMDD. That’s the expiry date of the DLC.

Yes, every DLC has an expiry date. Therefore, it’s necessary to give yourself sufficient time to let your trade play out.

Did you find this article on DLC interesting?

There’s so much more to DLCs that I’ll have to split it into several parts。

Are You Eligible To Trade DLCs?

Every DLC derives its pricing from its underlying asset. Therefore, DLCs aren’t suitable for everyone. You’ll need to be qualified to trade Specified Investment Products (SIP) in order to be able to trade the DLCs.

Fret not if you’re a beginner trader who wishes to trade DLCs that are listed on Singapore Exchange (SGX). You can begin trading DLC after taking a free online course by SGX.

Great! Now that you’ve discovered if you’re eligible to trade DLCs, it’s time to explore more about DLCs in Part 2 (to be released).

5 Things You Must Remember

#1 DLC is a derivative product which isn’t suitable for new traders. However, you can attend an online course by SGX to be deemed fit trading DLCs.

#2 There are 2 types of DLCs – Long DLC and Short DLC

#3 DLCs are meant for directional trading. Trading with the trend is more likely to reap you rewards.

#4 You know how to read a DLC name

#5 Every DLC has an expiry date. You’ll want to give yourself enough time for your trade to work out.

Here’s What You Can Do To Improve Your Trading Right Now:

#1 Join us in our Facebook Group as we can discuss the various ways of applying this by clicking here

#2 Never miss another market update; get it delivered to you via Telegram by clicking here

#3 Grab a front row seat and discover how you can expand your trading arsenal in our FREE courses (for a limited time only) by clicking here

Trade safe!

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