Contract for difference (CFD)
Information about contract for difference
What is a contract for difference (CFD)? | How do I start CFD trading? | What are the advantages of CFD trading South Africa? | List of available CFD contracts | Risks of trading contracts for difference | What are the costs? | What are the banking details for CFDs? | Who is providing the service? | CFD corporate actions | Examples of long or short contracts | Where can I find more information about CFD trading?
What should you do next?
Contracts for difference (CFDs) are 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; the trader is then entitled to the difference. A CFD is a contract of a standard quantity of a specific underlying asset, usually a listed share. Generally 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 enough money to cover the initial margin into your account on the CFD platform. 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" 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, a "long" position makes profit 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 a profit. Therefore "short" positions make profit 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, in this case, PSG Online.
Please note the following with regards to CFD trading with PSG Online:
- CFD transactions are entered into on a principal-to-principal basis;
- CFDs are excluded from “intermediary services” as defined in section 1(1) of the FAIS Act and not regulated in terms of the FAIS Act; and
- CFD trades are not executed on an exchange. We however hedge every CFD with a trade on the JSE.
Get access to the PSG Online CFD Platform by completing 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 on the PSG Online trading system. 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 on the trading platform.
CFD trading in South Africa takes places in real-time on the market through the PSG Online CFD trading platform. The PSG Online trading system provides direct market access that enables you to place orders, receive order confirmations, and view live holdings and cash available 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 than the full cost of the underlying shares. The robust trading platform allows you to release capital tied up in equity holdings and open new “long” or “short” CFD positions.
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 even takes your instructions after hours and executes them once the market opens. In addition, the CFD online trading system stores stop orders that monitor the market and executes at your chosen price once the market reaches your specified level.
Click here to view the latest list of contracts for difference and margin requirements available on the PSG Online trading platform.
Trading contracts for difference includes significant risks. The biggest risk is that you can lose more money than you started with. Other risks include over trading, large trades, trading short against the trend, trading unfamiliar stocks or instruments and not understanding leveraged products. The risk of loss in trading futures contracts or commodity options can be substantial and investors must 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. Contract 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.
PSG Online's standard CFD brokerage commission rate is 0,4% (excl VAT). We are always open to negotiate brokerage rates for active traders.
Interest on the total value of the open position is charged at SAFEX +2%. This is usually equal to around Prime -2%.
Script lending fees for short positions are 1.5% per year, charged per day on open positions, with a minimum of R250 per position.
Please note: Each new position opened on the CFD trading Platform 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 your trading account will be paid at the JSE Trustees rate.
The margin required for opening a position is determined by PSG Online as a standard percentage of the value of the total position. Margin rates vary between 15% and 20%. The latest margin rates per share are available once you have logged in to our trading system.
Resident account holders
|Bank||First National Bank (FNB)|
|Account Name||PSG Securities Ltd|
|Branch code||255005 (Standard Bank account holders to use 25500500)|
|Branch Name||Corporate Core Banking Johannesburg|
|Reference||Please use your BDA/cash account number as a payment reference|
For a full list of PSG Online banking details click here.
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 contract for difference shares is available once you have logged into the PSG Online trading website.
What happens if the underlying instrument is subject to a corporate action? Where the underlying security is affected by a corporate action, any relevant CFD will be adjusted accordingly to maintain the economic value of the contract for difference. Examples of corporate actions include capitalisation issues, rights issues, share buybacks, takeovers, and cash returns of capital.
Do I receive voting rights with my CFD?
No. To receive voting rights related to JSE-listed securities you must actually own the securities in your own name, which is not the case for a CFD because they are traded over-the-counter.
What happens when the underlying instrument pays a dividend?
A dividend adjustment is a credit or debit to your trading account based on the dividend value of the underlying instrument on the ex-dividend date or ex-date. CFD dividend adjustments are processed as follows.
Dividends on long CFD positions
Although not the registered and beneficial owner of the shares, a holder of a long CFD position is entitled to receive an equivalent of the amount of any dividend declared by the company (a manufactured dividend), after taking into account (less) any tax which may be applicable and / or administrative charges in respect of the dividend, on condition that the long position was open at the close of business on the day prior to the ex-date. The dividend payment is transferred to your trading account via a cash credit.
Dividends on short CFD positions
Conversely, the holder of a short CFD is required to pay a sum equal to the dividend declared by the company, provided that the short position was open at the close of business on the day prior to the ex-date. The dividend equivalent cash amount will be debited from your trading account. Because the actual share will usually fall by the same amount, the short seller is neither advantaged nor disadvantaged by the transaction.
Click here to view examples of CFD trades that can be conducted on the PSG Online CFD trading platform.
You can find comprehensive information about CFDs on our contracts for difference FAQ page.