What are CFDs?
In a nutshell a CFD (Contract For Difference) is an unlisted instrument that is an agreement between a
buyer and a seller to exchange the difference in value of a particular underlying asset (like a share) for
the period between when the contract is opened and when it is closed. The difference in value is
determined by reference to the underlying asset. CFDs are unlisted and counterparty risk is not
guaranteed by an exchange. It is therefore very important that you deal with a big financial institution like
Sanlam that will not go bankrupt. Your counterparty will be Sanlam Private Investments, part of the
Sanlam Group.
CFDs on JSE listed shares will be traded on the same Iress trading platform currently used for
trading JSE instruments. You don’t have to learn a new system. All you do is to select the account you
wish to trade on, your BDA account for JSE instruments or your CFD account for CFDs. You can also
trade CFDs on the IOS App.
Advantages of trading CFDs versus trading shares:
- Leverage/Gearing: CFD instruments allow the client full exposure to the underlying share with less capital layout. It requires a small amount of capital layout called the initial margin. At 15% margin, gearing is nearly seven times.
- Open short positions: CFD’S allow the trader to go short the market when it feels the share price is going to fall in future. This allows the trader profit when market goes up as well as when the market falls.
- Pairs trading: ‘Pairs of stock” is a method used if the trader feels the one stock will outperform the other. The trader may feel SBK will outperform Anglos will outperform Billiton and thus buy Anglos and sell Billiton short.
- Trading costs can be a lot cheaper than for trading shares. For example:
Details |
CFD |
Underlying instrument |
Instrument and price traded |
1000 XYZ CFD contracts @ R100 |
1 000 XYZ shares @ R100 |
Exposure |
1 000 XYZ shares = R100 000 |
1 000 XYZ shares = R100 000 |
Costs: |
|
|
Market maker’s commission / Brokerage |
R350,00 |
R575,00 |
STT |
R0,00 |
R250,00 |
STRATE |
R0,00 |
R10,92 |
VAT |
R49,00 |
R82,03 |
Total costs |
R399,00 |
R917,95 |
% costs/exposure |
0,4% |
0,92% |
Risk:
- At the outset it should be noted that trading in CFDs is more risky than direct share trading and should only be attempted by individuals who are already familiar with the share market and are comfortable with the concept of gearing.
- Gearing can increase profits, but it can also increase losses. Stop-loss techniques and predetermined exit strategies are an integral part of CFD trading and should be studied before trading as they can assist in limiting losses in volatile market conditions.
- It is important to note that the liability for a holder of either a long or short CFD position is not limited to the initial margin deposited. If the market moves against a position then the holder of that position may be called upon to pay additional funds on short notice to maintain the position.
Useful Links:
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