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- What is a Trader?
- Key Takeaways
- Understanding Traders
- Trader Operations: Institution vs. Own Account
- Discount Brokers: An Important Resource for Traders
- Electronic Foreign Exchange Trading Platforms
- Short-Term Capital Gains Tax
- What is Options Trading? 5 Things You Need to Know Before Trading Options in Singapore (2020)
- Options Trading
- Call Option
- Put Option
- 5 Things to Know Before Trading Options in Singapore
- #1 Be Wary of Unregulated Online Trading Platforms
- #2 Be Wary of Binary Options
- #3 Singapore Uses Warrants Instead of Listed Options for Trading
- #4 There is Not Much Difference Between Options in Singapore and Options in US
- #5 Many Option Traders in Singapore Exclusively Trade in the US
- Financial trader
- Types of financial trader
- Working hours
- What to expect
- Related case studies
- Work experience
- Professional development
- Career prospects
What is a Trader?
A trader is an individual who engages in the buying and selling of financial assets in any financial market, either for himself or on behalf of another person or institution. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, while traders tend to hold assets for shorter periods of time to capitalize on short-term trends.
- Traders are individuals who engage in the short-term buying and selling of an equity for themselves or an institution.
- Among the drawbacks of trading are the capital gains taxes applicable to trades and the costs of paying multiple commission rates to brokers.
A trader can work for a financial institution, in which case he trades with the company’s money and credit, and is paid a combination of salary and bonus. Alternatively, a trader can work for himself, which means he is trading with his own money and credit but keeps all of the profit for himself.
Among the disadvantages of short-term trading are commission costs and paying away the bid/offer spread. Because traders frequently engage in short-term trading strategies to chase after profit, they can rack up large commission fees. However, an increasing number of highly competitive discount brokerages has made this cost less of an issue, while electronic trading platforms have tightened spreads in the foreign exchange market. There is also disadvantageous tax treatment of short-term capital gains in the United States.
Trader Operations: Institution vs. Own Account
Many large financial institutions have trading rooms where traders buy and sell a wide range of products on behalf of the company. Each trader is given a limit as to how large of a position he can take, the position’s maximum maturity and how much of a mark-to-market loss he can have before a position must be closed out. The company has the underlying risk and keeps most of the profit; the trader receives a salary and bonuses. Most people who trade on their own account work from home or in a small office, and utilize a discount broker and electronic trading platforms. Their limits are dependent on their own cash and credit, but they keep all profits.
Discount Brokers: An Important Resource for Traders
Discount brokerage firms charge significantly lower commissions per transaction but provide little or no financial advice. Individuals cannot trade directly on a stock or commodity exchange on their own account, so using a discount broker is a cost-effective way to gain access to the markets. Many discount brokers offer margin accounts, which allow traders to borrow money from the broker to buy stock. This increases the size of the positions they can take but also increases the potential loss.
Electronic Foreign Exchange Trading Platforms
Foreign exchange trading platforms match currency buyers and sellers in the spot, forward and options markets. They sharply increase the amount of price information available to individual traders, and thus narrow price spreads and reduce commissions.
Short-Term Capital Gains Tax
A disadvantage of short-term trading profits is that they are usually taxed at the trader’s ordinary income tax rate. Long-term capital gains are taxed at 20% but require the underlying instrument be held for a minimum of one year. Under current laws, there is no technical definition of traders for taxes.
While there is a Trader Tax Status (TTS), election for this status is based on presented facts and circumstances of an individual. Some of the facts that the IRS considers while evaluating traders tax status are holding period of securities, number of trades conducted, and frequency and dollar amount of trades.
There are workarounds for traders to reduce their tax liabilities from short term trades. For example, they can write off expenses utilized in their trading setup, much like a freelancer or small business owner. If they selected Section 475(f), traders can value their entire trades for a particular year and claim deductions for the losses they incurred.
What is Options Trading? 5 Things You Need to Know Before Trading Options in Singapore (2020)
With Singapore being regarded as the world’s fourth largest financial center, trading options is therefore not a rare activity.
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In fact, it has become more popular in Singapore ever since after the 1990s. There are even seminars on options trading held in Singapore almost every day.
However, even with its popularity, many would still regard it as a risky endeavour. But there is no need to fret. If you are planning to trade options in Singapore but don’t know how to get a jump start with it, then you are just in the right place.
We have listed below 5 helpful things you need to know before you start trading options in Singapore.
But before anything else, let us first define what options are:
“a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price during a certain period of time or on a specific date.”
In simple terms, an option is a contract that allows the buyer to hedge against the risk of prices movement of the underlying asset. Traders , on the other hands, use options to speculate the prices and make a profit should they being right.
Here are two more terms to help you understand options more:
Call options provide the buyer an option to buy stock at a certain price—which would make the buyer want the stock to increase. On the other hand, the option writer/trader would want the opposite to happen.
In cases where the stock does goes up, the trader is obliged—under contractual obligation—to provide the underlying shares most especially when the stock’s market price exceeds the strike.
Contrastingly to call option, put option gives the buyer the option to sell stock at a certain price. In order to gain, the buyer would want the stock to go down. Likewise, the put option writers would want the opposite.
This especially applies when the underlying market price of the stock will fall below the specified strike price on or before the specified date written in the contract.
Now that we have that covered, let us now move on to the 5 things you need to know about trading options in Singapore:
5 Things to Know Before Trading Options in Singapore
#1 Be Wary of Unregulated Online Trading Platforms
Usually, newbies fall trap into signing up for Foreign Exchange or Forex trading seminars on unregulated online trading platforms. And we can’t blame you; what with the “get rich quick” advertisements and their claims of having 100% return trading options.
However, instead of believing, you must take these as red flags.
One reason for that is how the options trading world is very dynamic. Nothing can be set to stone. Those who claim to make complete success with their returns are definitely lying. In one success out of ten trades, the other 9 failed.
Trading with unregulated online platforms puts you out of the protection of laws and regulations made by the MAS or the Monetary Authority of Singapore to safeguard investors. Continuing to do so will make you very vulnerable to scams and other difficulties such as contacting or resolving any grievances.
On the other hand, regulated financial institutions online are subject to regulations that protect investors’ money and assets. Furthermore, these institutions are required to maintain segregated customers accounts, controls, and records.
So as an investor, you are strongly encouraged to only deal with those financial institutions regulated by MAS.
#2 Be Wary of Binary Options
In line with the first point, unregulated online trading platforms offer another form of investment instrument that you must also be wary of: binary options. Binary option is a type of option that references an underlying instrument.
This instrument can be in a form of asset classes like stocks, commodities, currencies, and interest rates.
The returns of this kind of options are dependent on the instrument. If the threshold amount is exceeded, then there will be payment received. On the other hand, if the threshold is not met, then there will be no payment at all.
While it is true that binary options may provide the potential for high profits, it could also give you a significant amount of loss.
Always be skeptical when unregulated platform providers advertise binary options as “trading with zero risk”, “trading amounts of as little as $1”, and “profit payout of 500% per trade”.
These could be an indication that these platforms could be based outside Singapore which are the most unlikely to recover you any amount of money lost.
#3 Singapore Uses Warrants Instead of Listed Options for Trading
Singapore uses warrants as an options trading tool instead of listed options. It is the country’s market equivalent to the standardized equity options or standardized stock options.
Like options, warrants are contracts between the issuer and the investor that allows the investor the right but not the obligation to buy or sell the underlying stock at a fixed price during expiration.
They are securitized so that they can be traded like a stock in a derivatives exchange.
Warrants and Options also work the same way when it comes to call and put. However, they also differ in a lot of ways.
Here is a list of the main differences between structured warrants and standardized stock options, as listed by OptionTradingPedia.com:
|Contract Terms||Defined by issuer||Standardized by exchange|
|Trading||Cannot be freely shorted||Can be shorted|
|Strike Prices||Only those issued||Usually a lot more strike prices and expiration|
|Delivery||Delivered by issuer||Delivered by investors|
#4 There is Not Much Difference Between Options in Singapore and Options in US
Options listed in Singapore are not much different from those listed in the US. At the onset, an option is simply a derivative base on an underlying instrument. There is no difference.
However, the only thing that contrasts the two is the size of their markets. The US market is wider and deeper. So there is a lot of liquidity.
There are also options listed available in US stocks. This provides a wider selection of trading choices for traders.
#5 Many Option Traders in Singapore Exclusively Trade in the US
Since the rise of popularization of online platforms in trading, more and more online options trading brokers accept Singaporean accounts. As a result, options trading in the US market have become more accessible to traders in Singapore.
Singaporean could now directly conduct options trading in the US market which is more convenient to them in terms of having their money wired to and from their accounts.
The most important reason why Singaporeans do this is that the US market is the biggest and provides more liquid options in the world. Therefore, there are more trading opportunities and grants exposure to international blue chips.
Furthermore, the US Market’s standardized stock options comes with a lot more strike prices across more expiration dates.
If you have an analytical mind and the steely resolve to read financial markets and make confident decisions, you’ll excel as a trader
As a financial trader you’ll buy and sell shares, bonds and assets for investors, including individuals and banks. You’ll make prices and execute trades, seeking to maximise assets or minimise financial risk.
Types of financial trader
There are two types of trader:
- Flow traders — buy and sell products on the financial markets for the bank’s clients. Products include securities and other assets such as futures, options and commodities.
- Sales traders — take instructions directly from clients, placing orders and advising them on market developments and new financial ventures. They act as intermediaries between the client and the market maker.
Traders may specialise in a particular product, such as shares, fixed-interest bonds or foreign exchange (FX) markets.
Before 2008, it was common for traders to use a bank’s money to bet against predicted movements in the market. Following the financial crisis, however, this type of proprietary trading has been banned or is in the process of being banned. Banks will have to ‘ring-fence’ high street banking businesses from the investment banking arms, in order to prevent another taxpayer bailout of the system. Banks have until 2020 to implement these changes.
While there are many similarities in the work of flow and proprietary traders and those working in sales, their roles differ substantially. The main difference is risk — sales traders do not take risks, while flow traders take risks in seeking rewards.
Work activities of a flow trader typically include:
- speaking with colleagues, making phone calls and making instant decisions
- making prices in their relevant products
- executing trades electronically or by phone
- liaising with sales traders or clients on market movements
- predicting how markets will move and buying and selling accordingly (especially derivatives traders, who try to predict the state of a market at a future date)
- informing all relevant parties of the most relevant trades for the day
- gathering information — critically about mispriced assets, detailed data analysis and valuation.
Traders in sales are more focused on the relationships with clients. They analyse and market new financial offers that they believe will be attractive to their clients.
The day-to-day activities of a sales trader may include:
- gathering information and analysing the market
- carrying out detailed data analysis and valuation
- providing in-depth market reports
- identifying issues affecting clients
- developing client relationships and presenting ideas to clients
- executing trades and securing deals with new clients
- keeping market-making traders informed of relevant issues with their customers and products
- obtaining market prices from market-making traders and executing the trade.
- Typical starting salaries for trainee financial traders can range from around £26,000 to £32,000, plus commission.
- The range of salaries for experienced traders is between £45,000 and £150,000+.
- An associate trader with experience selling credits could earn around £140,000 in a top-tier bank, or £230,000 if working in more lucrative derivatives.
Very high earnings are possible, especially for proprietary traders who are often paid a bonus equivalent to a proportion of the profits made. However, EU regulations, which came into force in 2020, limit bonuses in banking to no more than 200% of salary.
Additional benefits, such as non-contributory pension schemes and mortgage subsidies, are common.
Income figures are intended as a guide only.
Working hours are typically 7am to 6.30pm with experience, but may be considerably longer for newcomers. Foreign exchange (FX) is 6.30am to 5pm, while oil can be 8am to 6.30pm or 9.30am to 8pm.
Part-time work is not feasible, although job sharing is possible and career breaks are becoming more common.
What to expect
- The work is office based and the vast majority of opportunities are in London.
- Self-employment or freelance work is unusual without years of experience.
- The work is demanding and trading can be hectic. Managing large amounts of other people’s money is not a career to be taken lightly.
- Overseas travel is occasionally required and, depending on the client base, is likely at least once a month for traders in sales.
Related case studies
Although this area of work is open to all graduates, a degree in the following subjects may increase your chances:
Entry standards are high, usually requiring a minimum 2:1 degree, and the selection process is demanding. An assessment may include interviews and psychometric tests, sometimes all in one day.
Foreign language skills are an advantage as banks are expanding globally, not just in Europe but also in Asia and Latin America.
Entry without a degree or HND is difficult, although it may be possible to enter the industry in administrative roles, make contacts, and eventually move into trader positions.
You’ll need to have:
- strong numeracy skills
- excellent communication and interpersonal skills
- teamworking ability
- physical and mental stamina
- independent thinking
- an interest in finance and the financial markets
- alertness and decisiveness under pressure
- ability to accept responsibility.
Pre-entry experience is not needed but vacation work, internships and placements will give you an advantage. For further information see individual company websites.
Major investment banks recruit graduate trainees and offer internships or work experience, with some offering insight days for first-year students. Closing dates are normally in late October and early November for opportunities starting in the following summer or autumn. Banks may start to fill positions once applications open, so you’re strongly advised to apply early.
Most traders work in the City, which describes the UK financial services sector rather than a physical place.
The City is made up of a number of financial institutions involved in banking, asset management, insurance, and services to business.
Major institutions include:
There are also a number of market institutions, such as:
In addition to this, there are thousands of firms including insurance companies, investment houses and financial advisers.
The vast majority of traders are employed by investment banks. An investment bank is usually a financial house whose role is to finance the trading and commercial activities of others and themselves. The major investment banks have offices in financial centres throughout the world.
Investment banks have a high profile in the City and recruit significant numbers of graduates during peaks in the economic cycle. There is keen competition between investment banks and selection is equally rigorous.
Specialist investment management firms employ a small number of traders. Treasury departments of very large companies may employ a few traders, but this is less common.
Look for job vacancies at:
Most vacancies are filled via specialist recruitment agencies, by word of mouth and through speculative applications.
Networking and following up contacts can be useful in finding jobs. Check with your university careers service for a list of past students working in the industry who are happy to be contacted. Ask your family, friends and associates to see if anyone can put you in touch with someone working in the field.
Competition for entry is intense. Generally, vacancies are limited and entry standards are consistently high. Not all jobs may be advertised so it is advisable to write speculative applications, expressing your interest and your suitability should a post arise, and enclose an informative, targeted CV.
Persistence is essential. You must be able to promote yourself effectively and give evidence of the reasons you believe you will be successful in this career. Read the financial press, attend presentations and do thorough research about potential employers and the opportunities they offer.
Training is provided on the job and is often organised on a rotational desk basis. This usually consists of shadowing a more senior trader to watch what is going on and to learn the trading language (how to phrase questions and trades).
This training is supplemented by lectures, seminars and conferences. If traders are specialising in a product for a specific country, language training is frequently provided.
Before traders conduct any business, they must qualify to be placed on the Stock Exchange’s list of people who are eligible to trade. You are required to become an approved person by the FCA.
Relevant FCA-approved qualifications for traders, e.g. the International Certificate in Wealth and Investment Management, which is assessed by a multiple-choice examination, is offered by the Chartered Institute for Securities & Investment (CISI). Traders often have to take the examinations relevant to other European exchanges. Those choosing to do further study often go on to the Chartered Financial Analyst (CFA) Institute to complete the CFA programme.
Most firms pay for examinations, but individuals are expected to contribute a lot of self-study time. Graduate trainees are expected to learn quickly from other traders when starting out and need to be prepared to take on some menial tasks, such as data analysis and administrative duties, to assist other traders.
Generally, new entrants are considered as trainees for the first two years. After this, it’s likely that you’ll move up to the next level, provided your performance is satisfactory.
Once operational, traders who have completed their certificate-level qualification from the CISI may take the CISI Diploma or, more often, the CFA programme.
Although different banks have different job titles, promotion is generally structured as follows:
- graduate trainee
- analyst or trader
- senior associate
- vice president or executive director
- managing director.
It’s normal for traders to reach associate level about two to three years after their graduation. After associate level, the numbers able to reach executive director level are significantly lower. If you’ve proved yourself after five years, it’s not unusual to be given responsibility for a small team, possibly two or three small teams, and then to head up a new desk trading a new product or in a new country.
Regular moves between banks are possible at all levels, although such moves are more common from associate level and above. As many trading banks are international, there are opportunities to work in other locations and countries.
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