CFD trading South Africa allows a trader to make money by buying or selling an asset without owning the said asset. The trader can make a profit both during the bearish and bullish markets. CFD trading has become very popular because of the opportunity it gives South Africans to make money. It has to do with speculations on the possible rise or fall of a particular asset. While it is possible to make a lot of money from CFD trading, also bear in mind that the South African government tax the money you earn from the trading.
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There are so many CFD trading platforms or brokers out there today and most of them claim to be reliable. However, it is your duty to investigate an appropriate broker and find out if it is reliable or not before you partner with the outlet. The body responsible for regulating the services of CFD brokers in South Africa is the Financial Services Board (FSB). The body is also involved in regulating other brokers located outside the borders of South Africa.
What is CFD trading / CFD trading South Africa?
CFD stands for Contract for Difference. It makes it possible for the CFD trader to enter a trading position on Over the Counter markets in any particular financial asset, which can be treasuries, currencies, commodities, indices, and shares. A CFD can be referred to as a financial derivative that has a value predicted on a particular financial asset the trader can decide to speculate on the possible change in the value of the asset instead of purchasing the asset. The trader can get a profit or a loss depending on how correct his or her prediction is.
History of CFD trading South Africa
CFD dated as far back as the 1990s and it originated from London. It was used as an equity swap of sort traded on margin. Brian Keelan and Jon Wood are credited with the invention of CFD. The two of them came from UBS Warburg and they created the trading system on their Trafalgar House deal in the early 90s.
The two of them were former employees of the institution and hedge fund traders and they were hired because of their ability to trade hedge their exposure to stock in a cost-effective manner on the London stock exchange. CFD trading does not involve a physical exchange of shares. As a result, it can be done without the payment of stamp duty.
Retail traders started taking advantage of CFDs in the late 1990s. They became very popular because they were used by several UK companies and the trading activities take place on highly innovative online trading platforms. The platforms made it very easy for the CFD traders to know the live prices of different assets and then carry out trading activities in real-time. One of the first set of companies to participate in the use of CFD trading is Garrard & National Intercommodities (GNI).
How CFD trading South Africa works
CFD trading makes it possible for the trader to make money or record profit either the market goes up or down. CFD trading is a lot more convenient and flexible than the traditional type of trading and this is one of the reasons why many people in South Africa go for it. It makes it possible for the trader to avoid having to purchase the asset physically; all the trader has to do is to trade on the worth of the asset in question. The trader does not own the asset being traded. Instead, the trader will have the opportunity to take advantage of the rise or fall in the price of the asset concerned.
Trading from a single trading account
CFD trading allows traders to trade from a single trading account on the costs of a particular asset, like commodities, indices, currencies, and shares. Good examples of assets to be traded in CFD trading are gold and oil. Each of the CFDs comes with various features; one of them is the buy price, which can also be referred to as an offer price or an ask price. One other feature is the selling price or bid price. If the trader expects the price of the asset to rise, he will buy. If he expects the price to fall, on the other hand, he will sell. Buying is also referred to as “going long”, while sell is called “going short”. You can also call a buy trade a long position or a long trade, while you can call a sell trade a short position or short trade.
If the current price of gold is $1600 per oz, for example, and you anticipate a rise in the price of the asset, you can then go-ahead to open a buy trade at the current price of gold; that is, $1600. If you close the trade when the value of gold reaches $1650 for example, it means that you will make a profit of $50. CFD makes it possible for you to make such a profit without even owning the asset at all.
The reverse is also possible if you think the price of the underlying asset will fall. If the current price of gold is $1600, for example, and you expect the price to fall following your analysis, you can then enter a short position at the current price of gold; that is, $1600. If the value of gold falls to $1540, for example, and you close it at that new price, it means you have made a profit of $60 from the trade. The more the price moves in the particular direction you expect it to move, the more money you can make from the trade.
Aside from the ask price and bid price, some other important concepts you must take note of in CFD trading are highlighted below:
CFD traders can access the leverage to help boost their capital. With leverage, the traders can access a bigger market portion withstood being required to provide all the funds needed to trade that position and this is one of the many features that make CFD as profitable as it is. If you have up to $2000 in your CFD trading account and you use a leverage of 50:1 from your CFD broker, it means that the broker will contribute $50 for every $1 that you are risking on that trade. Simply put, $2000 will allow you to trade up to $100,000 if you use a leverage of 50:1
As a result of the above, you can open a large position with a very little amount of money. This will be far higher than what you would have made from the traditional kind of trading. While leverage can help you to make a lot of profit, it can also cause you to make a lot of losses. The CFD trader in South Africa should see leverage as a two-edged sword. So, it should be used with great caution. You should also bear in mind that the profit or loss recorded form using the leverage will be derived from the total size of the opened position; this refers to the difference between the initial and final prices of the asset. The initial price represents the price at which you entered the trade, while the final price is the price at which you closed the trade.
Leverage can increase profit or loss significantly. It is even possible for the losses to be higher than your initial account balance. You should, therefore, use leverage with caution.
CFD trading South Africa Margin
Margins in CFD trading are of two types; there is a deposit margin and a maintenance margin. A deposit margin is an amount needed for opening a trading position.
The maintenance margin, on the other hand, is the margin needed if your deposit margin and any other fund in the trading account cannot cover potential losses. In this situation, the CFD broker that you register with may call you and request that you add more funds. This type of call is referred to as the margin call. Your trading position can even be closed if the fund in your account is not sufficient for that trade.
You can also hedge CFDs against losses in a different portfolio. If you hold several shares for example in a particular company in your preset portfolio but you are expecting the shares to reduce in value in the future, you can use a brief position via the CFD tare to neutralize a given number of potential losses. Any reduction in value of shares will get offset by any profit you get from your short CFD trade.
Spread in CFD trading has to do with the difference in price between the buy and sell process. The buying price is always expected to be above the current value of the asset in the market. As expected, the asking price will be lower than the current market price. You can expect the underlying market value of the asset to be between the two of them.
The spread covers the cost of opening a CFD trade and it is the first amount to be deducted from your account balance any time you open a trade. This shows that buy as well as the sell prices will be adjusted so that they can reflect the value of opening that trade. To calculate the profit or loss you get from any particular CFD trade, you will need to multiply the number of the contracts by the value of every contract and then multiply the primacy answer by the point difference between the opening price and current price of the contract.
Advantages of CFD trading
Check below for some of the advantages of CFD trading:
- CFD trading does not expire. It can continue for as long as you want
- It can even be used by traders as a hedging strategy to recover losses in trading
- It allows a trader to trade anytime on both the rising and the falling market conditions
- Additionally, CFD trading grants the trader the power to travel both long and short on any particular asset.
- CFD trading offers a very good range of markets that the trader can take advantage of. It gives the trader access to several markets, like indices, shares, currencies, commodities, and so on. What is more, the trader can access all these markets and more from the very trading platform.
- Furthermore, CFD trading gives access to higher leverage. You can find many CFD brokers that offer higher leverage CFDs than what you will find in the traditional financial instruments.
- Traditional trading can be costly and you will be spared from the various prices in CFD trading south Africa.
Disadvantages of CFD trading
CFD trading has so many advantages, but it is also important to consider the disadvantages associated with it as described below:
- The spread can be costly.
- As a CFD trader, you are required to pay the amount of the spread when you open and close a trading position. As a result of this, it becomes very hard for the CFD trader to make small profits.
- CFD trading comes with some risks and you will have to develop a good trading strategy for you to be able to trade it effectively. Aside from a good trading strategy, the CFD trader also needs good risk management and money management strategies to be successful in CFD trading south Africa.
- Many CFD brokers and platforms are not reliable. The trader needs to carry out adequate research before he can get a reliable CFD trading platform or broker.
- Before you start participating in CFD trading, you need to first find a good broker that offers a good CFD trading platform. this can be a little bit challenging for a beginner.
Register with a Broker
Before you register with any broker, first find out if that broker is regulated or not. As a South African CFD trader, it is better to partner with a broker that is regulated by the Financial Services Board (FSB). This will see to it that your interest is protected at all times. The FSB does not smile when it comes to regulating the activities of financial service providers in South Africa and the safety of the trader is always at the front burner. So, you will be adequately protected if you trade CFD on a broker regulated by the FSB in South Africa. Find out also if the broker is licensed to operate as a financial services provider in South Africa before you register there to trade CFD.
You should also consider the issue of security and the number of years the CFD broker had been in the financial services industry. Taking a good look at the points mentioned above will help you to make the right choice among the many CFD platforms operating in South Africa today.
CFDs are traded between providers and traders. Each provider has its own terms and this removes any standard contract term. Be that as it may, the contract terms in many of the CFD brokers are similar in many ways. You can start your CFD trading south Africa adventure by first opening an account with a CFD broker in South Africa. After that, you can deposit money to your trading account and then open a trade. However, you need to first analyze the market properly before you open trade so that you will not make wrong trading decisions.
Bear in mind that there is no expiration date for each trade you open on the CFD trading platform. You can also open trade on virtually any financial instrument of your choice. Bear in mind that the number of financial instruments available differs from one CFD broker to another. You may want to consider this fact before you register on any of the CFD brokers in South Africa. After you have opened a trading position, you will first need to pay the spread, which is the difference between the current price and opening price of the asset. The CFD broker may also charge you various fees, some of which are highlighted below:
- Overnight financing
- Account management
- Big-offer spread
CFDs do not expire as stated earlier. If you open a position overnight, it can be rolled over to the next day. This means that any profit or loss realized by the CFD trader in South Africa will be credited to the trader. CFD trading is done with margin and the trader must maintain a minimum level of margin in the least times. It is standard in CFD trading to record profit, loss, and margin requirements and they are being calculated constantly in real-time and they may be seen by the traders. If the amount of funds in the trading account of the CFD trader’s account reduces to a particular level below the minimum margin level, then the trader will be given a margin call in this regard.
How to choose a good CFD broker
CFD stands for Contract for Difference. It may be a derivative trading instrument. Those involved in CFD trading south Africa only speculate via the CFD trading platforms available to south African traders on the worth and movement of the various available assets. The trader will have access to so many assets and instruments to choose from, some of which include bonds, commodities, currency pairs, equities, and indices.
One of the best easy to enjoy trading Forex is to register with a regulated broker. Unregulated brokers are dangerous to your trading health and you should steer clear of them if you want to make headway in CFD trading. Check if the broker is well regulated and appropriately licensed before you register there. It is important to choose a broker regulated by the FSB as a South African CFD trader.
CFD trading South Africa Trading platforms
Trading CFD is done online and via trading platforms designed specifically for that purpose. A good example of trading platforms for CFD trading south Africa is MetaTrader 4. Some also prefer WebTarder. Virtually all types of trading platforms have mobile options so that traders can follow their trades via their mobile devices. The mobile options are compatible with both android and iOS devices. As a result, you will not be at a disadvantage irrespective of the trading platform you use. Aside from MetaTrader 4 and WebTarder, CFD traders also prefer some other types of trading platforms like MetaTrader 5 and several other proprietary trading platforms. However, the most commonly used among them is MetaTrader 4.
Series of account options
Many of the CFD brokers in South Africa offer several account options so that their traders can easily trade CFD as they prefer. Different brokers offer different minimum deposits, varying degrees of personalized support services, exclusive trading opportunities, and a series of educational resources. The leverage accessible differs from one account type to another and you can access various payment processing options on different brokers and account types. It is left to you to decide what you prefer among them.
Educational tools for CFD trading South Africa
As a CFD trader, it is very important to understand the dynamics of the CFD market. The CFD market is always changing and a system that wins today may fail tomorrow. One of the best ways to be on top of the situation is to learn as much as you can about CFD trading south Africa and how the market works. This will get you adequately prepared to take on the market and outwit it. It will get you adequately prepared to develop trading strategies that can always stand the test of time and remain profitable despite the constantly changing CFD market. It will also help you to better understand how to modify your trading strategy so that it can remain profitable despite the dynamism of the CFD market.
To make it easier for their registered traders to better understand the market and get prepared adequately for its dynamism, CFD brokers provide several educational tools that can help the trader to better understand the CFD market. A god understanding will bring about good preparation. Some of the series of educational tools you can find on these CFD brokers include the following:
- A comprehensive FAQ database
- Signal indicators
- Expert financial insights
- Economic calendars
- Market updates
- Great charting tools
How to pick CFDs
It may be difficult to decide the particular category of CFD that is best for the trader. There are so many instruments to choose from and each of them is tied to a series of assets. You can come by the following types of CFDs:
- CFDs on currencies
- CFDs on commodities
- CFDs on shares
- CFDs on Cryptocurrencies
One factor that can help determines the best CFD for you is the amount of knowledge you have about that particular CFD. You can learn a lot about the right CFD for you via the tutorials available on the broker’s website. The tutorials can open your eyes to the various CFDs and enable you to make the right choice among them. Many of the top-performing CFD brokers provide adequate educational tools to enable their clients to learn as much as possible about the particular type of CFD they may want to trade on.
Many people love CFD trading South Africa and many professionals are interested in it as well. As a result of this, you will not have a problem getting learning tools and materials that can enlighten you about CFD trading. You may also want to consider the foremost and most promising assets to help you decide which of the types of CFDs to opt for.
The condition of the various types of CFDs as obtained on your preferred broker can be a factor to bear in mind when choosing a type of CFD. Each type of CFD accounts has different commissions, spreads, and margin requirements. The leverage terms and trading costs are also very important factors to bear in mind when choosing the type of CFD to venture into. Leverage helps to boost the purchasing power of the South African CFD trader and the power is boosted according to the particular leverage you choose. Be that as it may, make sure you use leverage with care lest it costs you dearly.
CFDs on indices
Good examples are FTSE 1100 and DJIA. They represent the performance of a particular set of companies. The rise or fall of their values supported average values. As a result, there is no chance that their values will ever fall to zero. The CFD trader can buy or sell these assets without owning a share in any of the companies most CFD traders prefer to buy or sell the assets of blue-chip companies also called “growth stocks”; this includes tech giants.
CFDs on cryptocurrencies
Cryptos are highly volatile and this enables CFD traders to make money via speculation. There are so many coins out there, but the most prominent among them are highlighted below:
In CFD trading, the cryptocurrencies are priced against fiat currencies, especially the USD, which is the abbreviation for the United States Dollars. No coin is moved in CFD cryptocurrency trading and this removes security concerns as it is the case in the sales and purchase of the cryptocurrencies.
CFDs on commodities
Commodities are connected to various products like petroleum and gold. The prices of these items are determined by the market irrespective of individual producers. A CFD trader can buy or sell commodities without owning any of the assets. So, he does not need to buy or sell petroleum or gold physically before he can make money from the assets. He does not need to move tanks or barrels before he can profit from petroleum; the profit he generates is purely price-based. If you expect the value of commodities to increase, you can buy these assets via CFD trading. The reverse is the case if you expect the prices to reduce.
Frequently Asked Questions
What is CFD trading?
CFD stands for Contract for Difference. It is a special derivative for trading and it permits. The derivative is well-beloved by many because it removes the need to own an asset before you can make a profit from that asset. All you have to do is to take a position on the increasing or decreasing prices of assets. It has to do with fast-moving or highly liquid market instruments like currencies, treasuries, commodities, shares, and indices.
Is it safe to trade CFD?
CFD trading comes with a measure of risk that every trader needs to bear in mind before venturing into trading.
Is it possible to make money from CFD trading?
Yes, it is possible. Bear in mind also that you can record losses just as you can make a profit.
Is it safe to trade CFD trading south Africa?
CFD trading in South Africa, as it is in other parts of the world, comes with a good measure of risk. One of the most prominent of the risks has to do with leverage, which is the money the broker lends to the trader to enable him to control a big trading position per trade. To make CFD trading a lot safer for the South African trader, he needs to choose a good CFD broker. A CFD broker regulated by the Financial Services Board (FSB) can be trusted for your trading business in South Africa. This regulatory body protects the interest of South African traders against scrupulous CFD brokers.
How much money will I need to start trading CFD trading South Africa?
It is in your best interest as a beginner in CFD trading to start with the minimum amount required by your preferred broker. The minimum initial deposit differs from one broker to another. So, you need to find out what your broker charges as an initial deposit so that you can know how much to deposit. Most CFD traders in South Africa do not require more than a couple of thousands of South African Rands as a minimum deposit.
Which is the most common CFD trading platform?
There are so many types of CFD trading platforms out there today, but the most commonly used among them is MetaTrader 4. It is the most commonly used because it is the simplest of them all. This does not mean that other trading platforms are also not good.