Discover the advantages of trading CFDs

Fsp Invest Team, 06 May. 2013

Tags: trading cfds, cfds, benefits of trading cfds

Until 2000, Contracts for Difference (CFDs) trading was exclusively traded by institutional investors. But, nowadays they’re easily accessible as a trading product for private investors like you. Read on to discover the advantages of trading CFDs.

CFDs are Over the Counter (OTC) derivatives traded through a bank or company providing CFD trading. Basically, “CFD trade is an arrangement between two parties to exchange the difference between the closing price of the contract and the opening price of the contract,” explains the Ultimate Contracts for Difference Guide.
The two parties involved are you, the trader, and the market maker (such as Global Trader or Nedbank).
Although over the last few years CFDs have become increasingly popular in South Africa, it’s important that you fully understand what CFDs entail if you’re looking to explore this investment option.
Two benefits of trading CFDs
·         Low trading costs. CFDs allow you to trade without having to pay for the full value of the shares. This is because you trade on margin, which provides you with gearing also known as leverage, on the capital you invest. This means you can free up your capital and put it to other uses.
In most cases, “the margin required will be 9% to 25%. This is all dependent on the underlying equity, its sector and the exchange where it’s listed,” says the Ultimate Contracts for Difference Guide.
The advantage trading CFDs, as opposed to buying the underlying share, is the savings in many costs associated with buying equities. There’s no stamp duty payable, VAT depending on who you trade through, Securities Transfer Tax (STT), STRATE charges, lower trade commissions and there’s no delivery of the physical asset.
·         No expiry date. In most circumstances, CFDs don’t have an expiry date. This is one of the fundamental differences between CFDs and other derivative products like single stock futures. For example, a single stock futures contract will expire every 3 months. You either have to exit your trade or roll over into the next futures quarter and this has associated charges and fees. But because CFDs have no expiry date, “it means you can hold the contract indefinitely,” says the Ultimate Contracts for Difference Guide. But, remember financing costs add up if you hold a CFD for a long period of time.
There you have it! Now you know why CFDs are becoming an increasingly popular trading option in South Africa.

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