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Contract for difference (CFD)

Information about Contract For Difference

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WHAT IS A CONTRACT FOR DIFFERENCE (CFD)?

Contracts for Difference (CFD) contracts between two parties to settle at the close of the contract the difference between the opening price and closing price of a share specified in the contract. In other words, CFD trading is opened at a specific prevailing market price and closed at the reigning market price and the client is entitled to the difference. A CFD is a contract of a standard quantity of a specific underlying asset, usually a listed share. Normally this means that one CFD contract is equal to one underlying share.

CFD trading is geared which means you do not have to pay the full price of the underlying shares. The only requirement is that you pay into your account enough money to cover the initial margin. Therefore you might only need R15,000 to purchase contracts for difference up to a value of R100,000. If your investment rises to R115,000 - equalling a 15% rise in the value of the position - you will in fact make a 100% return on your investment, as you only invested R15,000 initially.

At PSG Online we hedge all our CFD trades in the market through a direct market trade in the underlying share.

Another important feature of CFD trading is that you can open a "long" position or a "short" position. A "long" position involves purchasing the contracts and selling them again at a later stage, hopefully after the price has risen. Therefore "long" positions make money in a rising market. A "short" position is the reverse - selling contracts first and buying them back later. Behind the scenes, PSG Online will borrow the shares on your behalf, allowing you to sell them even though you do not actually own them. If you manage to buy them back at a lower price, you will make money. Therefore "short" positions make money in a falling market.

CFD's are very powerful trading instruments that will benefit active traders who look to optimise their cash flow and benefit disproportionately from small market movements. However, contracts for difference are not listed instruments - they are traded as "over the counter" contracts between you and your stockbroker.

HOW DO I START CFD TRADING?

If you are interested in CFD trading you can complete the simple online registration process.

STEP ONE: Register online for a CFD trading account and PSG Online web profile.
STEP TWO: If you are new to PSG Online, send us your FICA details. PSG Online will open your CFD account within 72 hours of receipt of your FICA documents.
STEP THREE: Login to your account. You will use the same username and password chosen when you registered for your web profile in Step One
STEP FOUR: Select the appropriate CFD online account and place an order through the New Order screen.

WHAT ARE THE ADVANTAGES OF CFD TRADING SOUTH AFRICA?

CFD trading in South Africa takes places in realtime on the market through the PSG Online trading platform. You can place your orders, receive order confirmations and view a live holdings and cash available screen as your trades are matched in the market.

CFD trading is a capital efficient investment that allows you to diversify or hedge your portfolio, because CFDs require only a margin deposit to open a position rather and the full cost of the underlying shares. You can release capital tied up in equity positions or open new positions that are long or short.

At the same time, contracts for difference are cost-effective hedging vehicles that allow you to fully exploit market movement whilst benefiting from corporate actions. Short positions allow you to make money even in a falling market.

Our CFD online trading system can take your instructions after hours and execute them once the market opens. Our CFD online Trading system can also store stop orders that will monitor the market and execute at your chosen price once the market has reached the exact level you specified.

Get full control over your CFD online trades, register today for your account.

RISKS OF TRADING CONTRACT FOR DIFFERENCE

The single most significant risk of trading Contracts for Difference is the fact that you can lose more that the money you started your trade with. The risk of loss in trading futures contracts or commodity options can be substantial; investors should understand the risks involved in taking leveraged positions.

No one should trade CFDs unless they are experienced traders that possess the knowledge, risk control and financial capacity to trade such instruments. Contracts for Difference traders require a high appetite for risk, time to watch the markets and an expert knowledge of the markets and trading process. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

WHAT ARE THE COSTS FOR CFD TRADING IN SOUTH AFRICA?

Our standard CFD brokerage commission rate is 0,4% (excl VAT). We are always open to negotiate brokerage rates for clients who trade the market actively.

Interest on the total value of the open position is charged at SAFEX +2%. That is normally equal to around Prime -2%.

Script lending fees for short positions are 1.5% per year, charged per day on which the position is open, with a minimum of R250 per position.

Please note each new position opened needs to have a minimum cost value of R25,000 - which requires a R3,750 (15%) initial margin deposit from the investor on a Top 40 stock and R4375 (17.5%) initial margin deposit for Top 41 - 100 stocks.

Interest on cash balances in the account will be paid at the JSE Trustees rate.

The margin required for opening a position is determined by PSG online as a standard % of the value of the total position. Margin rates vary between 15% and 20%. The latest margin rates are available per share after you have logged in to our trading site.

WHO PROVIDES THE ONLINE CFD TRADING SERVICE?

We offer direct, market access to the JSE with live prices for all shares in the Top 100 index, weighted by the market capitalisation of the underlying assets. There is also a further requirement for liquidity - in other words there must be frequent trading in the underlying stock. The latest list of shares available for Contracts For Difference can be found on our website, available once logged in.

Get access to a range of CFD contracts, register to create your CFD portfolio.