Jun 26 2020 0
CFD - Contract for Difference is an agreement between two parties involved in the issue of value difference of a specific asset. Today, we will learn about CFD trading in South Africa.
About CFD trading
When the contract expires, or when the contracting party decides to close the position, the seller will pay the buyer the difference between the current price and the price when the position is opened, if the price of the particular asset goes up. Or vice versa, if the price of a particular asset decreases, and the difference between the current price and the initial price is negative, the buyer must pay the difference to the seller.
CFDs are derivatives that allow traders to profit from the volatility of different assets. At the same time, due to greater flexibility and accessibility, arbitrage provides some advantages over when dealing with specific assets. CFD contracts can be derivative based on a variety of assets, including foreign currencies and CFDs based on foreign currency assets that are commonly referred to as Forex. CFDs for assets other than Forex such as bonds, stocks, index indexes, real estate, coffee, cocoa, cereals, gold, silver, metals...
CFDs were born with the main purpose of taking advantage of the difference in profit, so it will not be possible to profit when the market is flat.
CFDs on stock indices are traded similarly to currency contracts. CFD contracts can be viewed as instruments for trading most financial products on a spread platform. This means you do not need to invest the entire nominal value of the asset. CFD does not require execution rights on the underlying asset. As stated before, the purpose of CFD is just to enjoy the difference so that in most cases CFD will not have a right to exercise the rights on the underlying asset. Everything will be exchanged for money when the contract is closed. CFDs do not have an expiry date, so they will not decay over time.
Today, with high competition among stock brokers, CFDs will enjoy dividends if they are stock CFDs. For the case of foreign currency CFDs (forex) although it does not decay in value over time, forex trading will bear swap costs.
CFD trading in South Africa
Most brokers nowadays offer CFD trading services in South Africa. So, how can we know which one is the best?
Have you ever considered what a regulated forex broker is? Regulated brokers operate within the boundaries which are set by financial organizations that monitor the forex trading activities in South Africa such as IFSC (South Africa regulation) that they have signed up with. These regulatory organizations make sure that the brokers must always offer a safe forex trading environment for the traders as well as keep client’s funds safe and intact.
Spread can be a very important factor to consider when you choose a broker for CFD trading in South Africa. For instance, if a broker’s spread is above 10 pips, it can be said that they have wide spreads. If the spread is below 2 pips, it is viewed as tight spreads. The spreads on FX pairs are different among brokers. In fact, to maximize profits, traders will find a broker with the lowest spread rates on the pairs they trade.
Leverage: It is an amplifier used in trading Forex pairs. For example, leverage is presented in a format like 300:1 – in this case, traders can increase the size of the trade by a max amount of 300 times. Leverage Different brokers offer different leverage. Brokers may also reserve the right to limit a client’s leverage based on their experiences.
When a forex broker can meet these requirements, you are sure that that broker is the most suitable and safest for CFD trading in South Africa.