What is CFD Trading?
A CFD stands for “contract for difference”. CFD trading allows you to take a position on the price of an instrument without actually owning the underlying asset.
A contract for difference creates, as its name suggests, a contract between two parties on the movement of an asset price.
There are several key features of CFDs that make them a unique and exciting product:
+ CFDs are a derivatives product
+ CFDs are leveraged
+ You can profit from both rising and falling prices
A Contract for Difference (CFD) is an agreement between a buyer and a seller to exchange the difference in price of an underlying
instrument over a period of time. CFDs provide clients with an opportunity to get geared exposure to the performance of a share in a simple
and cost efficient format. CFDs allow investors to position themselves in relation to the rise or fall of JSE-listed securities, without the need
for ownership of such securities.
CFDs are leveraged products that require an investor to deposit cash as margin rather than the payment of the full value of the underlying
position. Depending on the position taken by such an investor, the investor may be either the long or the short holder of the CFD. Effectively
cash is being borrowed by the long holder and lent by the short holder in respect of the underlying security. The initial margin deposit will
vary depending on the stock traded but will provide for gearing of between five and ten times.
What are the benefits
Investors gain access to larger exposures of underlying securities by means of leverage/gearing.
This means that investors outlay a relatively small amount of capital (in the form of a margin) to secure an exposure to the underlying security.
Simple pricing methodology.
The price of the CFD mirrors the price of the underlying instrument.
Interest and dividends are not priced in upfront, but are rather paid daily while the position is open, allowing the CFD always to track the underlying instrument’s price.
Lower costs than trading in the underlying shares
CFDs are a cost effective method of gaining geared exposure to a stock.
No securities’ transfer tax is payable on the purchase of a CFD.
There are also no clearing and settlement fees associated with buying or selling a CFD.
A CFD is a perpetual contract, which means a position will not expire unless the position is closed out.