There are many different kinds of trading. One of them is CFD trading South Africa. It may sound confusing and hard to explain, but I can change your mind right now. Read on to find out about this topic.
What does ‘‘CFD’’ mean?
The abbreviation CFD stands for ‘‘Contract for Difference’’. The contract for difference is a popular form of derivative trading. This kind of trading enables you to speculate on the rising or falling prices of fast-moving global financial markets or instruments such as shares, indices, commodities, currencies, and treasuries. It allows trading without actually buying all the stocks. A contract for difference is a financial arrangement in which trades take place without ownership of the asset changing hands. The buyer and seller participate in a transaction based only on the price movement of the share, not on the stock itself.
How to trade CFDs in South Africa?
The first step towards a trading contract for differences is to learn how they work. Of course, there are a number of differences between CFDs and other forms of trading and understanding these nuances can help you trade more effectively. First, you need to create and fund an account, applying for a contract for difference trading account is a straightforward process and usually takes just a few minutes to complete. Once the details you provide have been verified, you will need to fund your account. You can add funds via credit card or debit card, BPAY or PayPal.
To trade contracts for differences, you first need to decide on which market you want to trade on. If you want you can get trading inspiration through a fundamental and technical analysis research portal. Then you decide if you want to buy or sell something and you click ‘buy’ if you think the price will increase in value or ‘sell’ if you think the market will fall in value. The next step is to build a trading plan, which is a comprehensive blueprint for your trading activity. Among other things, this should include your motivation, time commitment, goals, attitude to risk, available capital, markets to trade and preferred strategies.
A trading plan can help you make better decisions under pressure because it defines your ideal trade, desired profit, acceptable loss, and risk management strategies. Also, you have to select a trade size and choose how many CFDs you want to trade, if we accept that 1 CFD is the equivalent of 1 physical share in equity trades. You need to add stop loss (an order to close your position out at a certain price if it moves too far against you). Once you have placed your trade, you will see your profit/loss update in real-time at the top of the screen, then you can exit your trade by clicking the close trade button.
CFD trading in South Africa
The Single-stock futures (or SSFs for short) contracts have overwhelmingly ruled trading activity on the Johannesburg Stock Exchange (JSE) for the last few years. In the last quarter of 2007, single-stock futures accounted for almost 80.5% of all contracts traded on the stock exchange – making South Africa one of the world’s biggest markets for single-stock futures – however, the dominance of SSFs is being challenged by increasing demand from retail investors into CFDs. An advantage that contracts for differences have over single-stock futures is the absence of dividend exposure – in fact as opposed to single-stock futures which are priced using a forecasted dividend, a CFD contract entails the agreement to swap dividends.
Presently over-the-counter derivatives such as CFDs in South Africa are not regulated or guaranteed by an exchange that introduces the counterparty risk element. In South Africa, they are also not regulated by the Financial Services Board and this also means that investors would do well to exercise caution in both the selection of CFD provider and the size of the position on any derivatives product and to understand the risk of any investment decision made.
Example of CFD Trading South Africa
If you are still not sure what the Contract For Difference (CFD) trading is, let me give you an example. For example, let’s take any given company you can think of. Let’s say the initial price of the company stocks is $100. You conclude (buy) a CFD contract for 1000 the chosen company stocks. If the price then goes up to $105, the sum of the difference, paid to the buyer by the seller will equal $5,000. And vice versa, if the price falls to $95, the seller will get the price difference from the buyer equal to $5,000. The contract does not imply physical ownership or purchase or sale of the underlying stocks that enable investors to avoid the registration of the ownership rights for the assets and the associated transaction costs. I hope now you understand how the ‘‘Contract For Difference CFD” works.