An Overview of CFD Trading South Africa
CFD trading is one of the most misunderstood types of trading available today. Unlike stocks or Forex, CFD’s (contracts for difference) are a whole new method that takes awhile to learn properly. This can be a great addition to the portfolio of the skilled investor once all the particulars are sorted out since this method can bring a handsome return on investment.
A newcomer would be wise to find out how this system works before entering this market however. There are a great many rewards offered by a speculator skilled in this method, and he can easily bank a large portion of his portfolio with CFD trading.
Probably the most key element in understanding how CFD trading works is to realize that the costs associated with hedging, going long or short on a trade are substantially cheaper using this method. To be more accurate, a buyer and seller agree to a contract where the difference in price between the time the stock is bought is compared to when its sold. This amount is paid out through a binding contract — essentially a CFD. An investor in this market looks at how trades are going for a particular day. He then decides whether to buy or sell stock at a pre-determined amount some time during the trading session. At some point, a trade is finalized by determining the net cost. This is the value of the actual number of shares involved times the difference in value from opening to closing on that day. So a profit is realized with a long position if the stock is at a higher position at close. However if the ending price is lower, and the seller has a short position, he will get paid by the buyer.
CFD trading has some similarities with stocks, but it also compares somewhat to the commodities market.
It can vary greatly as regards to a speculator’s particular methods and willingness to risk capital. This is not something for the weak of stomach since markets can change on a whim. Most of the traders in this market are of the short term variety, and they are looking for a short term gain before moving on to something else. There are other factors that have to be looked at when trying to compare CFD to any other type of speculation.
The CFD market is run mainly on margin. Thus the total value of the trade does not have to be available, only a small amount is necessary to deposit in an account. CFD prices are also quite liquid since this market is quite dynamic in its price flows. There are also very low costs in order to make a transaction in the CFD market as compared to stocks. A CFD trader can also sell short, effectively hedging his portfolio. A short term decline can realize a profit in this way while not destroying the current portfolio.
There are some disadvantages also with the CFD trading market, and the first is leveraging (i.e. overextending). While it can be used for profits, sometimes this will backfire causing losses to multiply. There is also the higher risk involved with short terms trades. The market can be extremely volatile at times so while the margin is only a small amount of the stock value, it can be lost quite readily along with more money if the market goes the wrong way.
But many investors find online CFD trading in South Africa easier than most others, including Forex. This is mainly due to the fact that different currencies are harder to keep track of as the market can fluctuate due to current events.
Contracts for Difference: What are they? How does it work?
The contract for difference (CFD) is termed a financial instrument which has been gaining tremendous popularity across the globe. Also termed as ‘equity swap’ the CFDs are agreement between the seller and the buyer.
In a CFD agreement, the seller will be paying the buyer any difference between the total value of the given asset at a time of getting into contract and the value at the very end of the contract. There remains no volatility premium or time value in the CFD training. It is more of a sort of one-for-one equity swap.
Like “equity swap”, the contracts for difference can be tailored as per the individual requirements. Also, they avoid exchange fees as well. One of the biggest strengths of contract for difference or CFD trading is that you can easily trade on a margin and can use a little amount so as to get started.
Contracts for difference (CFD) prove to be one of the most popular sectors of the trading market these days. Contract for difference allows traders to pick up their own level of control and leverage. This in turns also helps traders to choose the level of risk they are eager to take.
Today, contracts for difference is getting more popular and most investors are making use of it instead of the traditional stock broker and buying paper shares. CFD Trading does not make you wait to collect the dividends. An investor can immediately get dividend credit.
Another most prominent reason which makes contracts for difference so popular in the United Kingdom is that no taxes are required to be paid. This can most automatically improve the dividends of the individuals by more than 0.05 percent or so. Also when you consider in long terms, then contract for difference can bring you significant gains in itself. The main reason behind this is that there are no tax stamps on the CFD trading.
If you are willing to invest and begin your journey in contracts for difference, then it will be important that you follow a clear-cut strategy before you dive in. It will be important to learn about the difference between the trading types.
The contracts for differences market is quite similar to that of trading in the future market. The only difference which lies is that they do not expire. To analyze the market of contracts for difference, it will be important to analyze its underlying market. You have to chart the underlying market while you make trades on CFD market.
Contracts for differences have been used by the private investors and traders. This is because they provide these traders the capability to trader both short term and long term. The online CFD trading helps you to chart CFDs.
There are trading software available online which help to chart the contract for difference. The online CFD trading prices can be directly streamed to the computers or mobile phones of the traders. This also helps in the prompt execution and even in high liquidity. You may even trade the index-trading contracts for difference for a simple one-click access to the world stock market investment. This security can well be used as a unique training tool as it is also available for the small deposit investors.
The low level of the initial deposit is what results in making the contracts for difference so popular among the investors. Other advantages of CFD trading include low rates of commission, instant dealing, flexibility and leverage are few of the benefits linked with sort of trading.
Online CFD Trading: Knowing Your Options
Online CFD trading is a cost effective way for novice investors to get started in the market. CFDs are contract for differences. Buyers and sellers enter into an agreement to purchase a CFD based upon an underlying security that regulates the price of the CFD. Investors profit from the difference in the price of the CFD at the time of the contract and the price at the time the investor wishes to exercise the security. Online CFD trading gives investors control over investing. This method is also more cost effective than securing a traditional CFD broker. A CFD trading platform is essential in online CFD trading. CFD trading software significantly reduces the guess work associated with determining entry and exit points into the CFD market.
Investors have several options for online CFD trading platforms and systems. Many companies offer CFD trading software, along with the forum to trade, for a low cost. The CFD trading software helps investors eliminate emotion and human bias often associated with investing. For instance, FXSolutions offers investors online CFD trading tools along with their account. Investors will also receive a free practice account with their subscription.
To enroll in this particular account, investors must possess as much as $250. The account operates on the Global Trading System; therefore, the investor may invest wherever CFD trading is offered. Automation of trades is also available through this online trading account. Investors are offered all of the necessary tools to make appropriate price predictions. Historical charts and other tools are available to assist traders.
Some companies will offer no commission trades as long as the investor meets a certain PIP requirement. Each company offers consumer different fees and online CFD trading tools for consumers. Each investor should research to determine which online trading company is best for them. Investors should verify that their online trading company offers leverage packages. This allows investors to invest a small amount of money and trade on a higher level. For instance, an investor may invest $100. However, leverage will allow them to trade with $20,000. This significantly decreases the initial investment required. In the investment world, this is called 1:200 leverage on CFDs.
Investors should also ensure that there are a variety of securities supported by CFDs. For instance, stocks, commodities, bonds, indices and shares should all be considered. Real time streaming stock quotes and news are also helpful for online traders. Free CFD trading software is also desirable for online trading. Online trading companies teach investors to invest based on trends rather than feeling. Investors should also select an online trading company that offers a demonstration or trial account. This will allow investors to practice and determine if CFD trading is suitable for their trading habits without suffering losses.
Many online CFD trading companies will also offer a 10 PIP slippage cushion. This will help individuals avoid catastrophic losses in their accounts. Novice investors appreciate these safeguards, and they are recommended. Investors should also ensure that their accounts will be protected up to a certain amount. The accounts should be regulated by FSA. Online chats with other investors should also be available to investors. This will allow investors to receive advice from others in the community, as well as, communicate directly with dealers.
CFD Trading Platforms South Africa and Systems
CFD is an acronym for contract for difference. CFDs are contracts between the buyer and the seller. The seller is required to pay the buyer the difference between the value at the time of the contract and the value of the asset when the contract expires or is exercised. Investors are able to monitor the market to take advantage of the prices moving up or down within the market. CFDs are currently not accepted by the U.S. Securities and Exchange Commission. However, CFDs are offered in the following countries:
• United Kingdom
• The Netherlands
• South Africa
• New Zealand
• Hong Kong (potentially)
CFDs initially began in London and were first featured on the London Stock Exchange in the 1990s. CFDs will be traded over-the-counter with a CFD provider or through a CFD trading platform . CFD providers are typically a CFD broker or a market maker. A market maker is the most common method available to investors. The CFD provider or CFD broker , in this scenario, will set the price for the CFD and make the order. Direct Market Access (DMA) was created for instances where the market maker price did not match the underlying securities price. The CFD provider will trade on the underlying market to match each CFD order. In both scenarios, the investor will not have ownership of the underlying security. Only the CFD will be owned by the investor.
CFD Trading Platform
Several online CFD trading South Africa providers offer CFD trading software to assist with CFD trades. A CFD trading platform may be automated to provide maximum flexibility for investors. CFD accounts are managed by allowing investors to set limits and controls for transactions made within the account. This takes some of the guesswork out of investing and some of the waiting and watching. An investor’s CFD trading system is also accessible via smart phones, such as BlackBerry and iPhone.
Global markets may be available through a CFD trading system . Streaming quotes are also available through the system. The information allows individuals to remain up-to-date on their investments. CFD trading software assists investors with making a variety of orders. For instance, some CFD trading software supports multiple order types and other order management tools. Other features on CFD trading software may include:
• Historical Charts
• One Click Trading
• Stops and Limits
• Floating Rates
• Flexible Leverage
• Market Orders
• Floating Rates
• Flexible Leverage
• News Reports
• GTS Ticker
Countless other options are also available with CFD trading software . Investors should find a CFD trading system that is congruent with their trading styles and habits. A CFD trading system will significantly simplify the trading process for investors and make it easier to determine entry and exit points into the market. Historical charts are a good indicator of past behavior that will help investors predict future behavior. This will allow investors to make educated decisions about CFD investments.
Investors have the option of generating reports to chart their progress with trading software. This is much easier than keeping a written account or an Excel spreadsheet of your investments. A CFD trading platform and system are essential for any CFD investor entering the market.
Making Your First CFD Trade: Finding the Right CFD Broker
Contract for difference (CFD) is a sort of derivative product. This is where you make profit from the changes in the prices of the shares and stocks. These CFDs or Contracts for difference are the widely used trading tool of today’s market. CFD trading is a proven way to make smart investment as it allows the investors to take full leverage on their returns. To find out the most effective and remarkable method to help out investors is to find the most competitive account and CFD providers.
The right selection of CFD broker can help investors to reach out the most competitive CFD accounts. You should take into consideration factors like reliability and customer service in selecting a CFD broker. It is essential to make sure that CFD brokers provide satisfactory services which will most obviously suit your requirements and expertise. There are several of them and comparing each one of them is a tough task. However, it is important to ensure successful CFD trading.
The total number of CFD brokers is increasing continuously. But there are few simple methods for narrowing down your search for best CFD broker. Deciding on a CFD broker can be rightly done when you determine your own CFD trading requirements. You need to be clear with your own trading objectives so as to ensure the right CFD provider for you.
First of all, you need to decide on which sort of financial instrument you are seeking to trade. This is an important point to take into account before jumping on board with any CFD broker. For instance, many traders start out with the CFDs, by trading at the local stock market. Now most CFD brokers will be doing this for you. However, when you want to trade in a wide range of foreign markets, sectors and indices, then your selection of the CFD brokers will have to be narrowed down. It’s almost a universal rule that the CFD broker which allows you to trade at multiple exchanges all over the world is the real market-maker.
Market Maker or Direct Market Access (DMA) or Exchange Traded CFDs
When you are in search for the right CFD broker, you need to know the 3 ways to CFD trading. To start with the market maker order that is directly executed with the CFD broker. The CFD broker will buy those underlying instruments as a protection for the given position.
All orders placed with the CFD broker using the Direct Market Access (DMA) are generally placed directly into this underlying market by CFD brokers. When the given order trades in the current market then your CFD order is finally executed.
The Exchange Traded CFDs are provided by the Stock Exchange and are usually traded like the stocks with the orders placed into central auction flair run by the Stock exchange CFDs. Selecting between the market maker and the direct market access doesn’t have to be a difficult approach.
If you want to trade at the local exchange, follow a highest level of clarity, never obtain the re-quotes, see your own orders in market depth, participate in the closing as well as opening options, that’s how the Direct Market Access (DMA) will be the right choice for you.
On the other hand, when your main priority lies to access the global markets through one competitive account, including indices, foreign exchanges, sectors, commodities, then transparency towards the market depth has to be your main priority. And you can trade in all sizes. This is when the market maker can be the ideal choice for you.
Modern technology has been playing a significant role in the world of financial trading, which led to the introduction of online CFD trading. Today, it has emerged as a common practice for CFD providers to provide an online CFD demo account. Ideally enough, you would want to take the benefit of the free CFD trading demo account so as to ensure that you are more confident and comfortable in placing the trades online. While you try out the demo, it will be a good idea to make some enquiries pertaining to customer support and look through how the CFD provider operates its support services.
Last but not the least, when you are looking for CFD providers ensuring the right sort of support is very critical. When it is about CFD trading, prompt customer support from the point of view of dealing with the customers stands vital.
You should always ensure the CFD broker which offers you 24 hour assistance and support. The CFD brokers you choose must also offer you a good deal of free online tutorials to help you gain confidence in this system.
Following all the above mentioned ways will help you find out the best CFD provider to meet your CFD trading needs.
Image Courtesy: arotrade.com
Zita Zimande is a sports news journalist from the University of Johannesburg. Besides being a sports fanatic, she loves to cook during her spare time.