Some of you might be looking at CFDs and CFD Trading, and depending on your country, you may or may not have access to them. They’re popular in some areas, and they’re different products. There are pros and cons and things you should be aware of before trading them. So, that’s what this article is all about, specifically focusing on CFD Trading in South Africa. You’ll learn about how CFDs are traded, why they’re traded, and everything about it. So, let’s get started with it!

 

What exactly are CFDs?

CFD trading meaning

CFD stands for Contract For Differences. So, it’s a contract between you and the CFDs provider or the broker.

 

There are a few CFD providers, such as CMC Markets and IG Markets. You’ll have a contract with them to exchange the difference in price of something you’re trading.

 

In the financial market, it’s usually stocks, commodities, and even currencies, and you can have a contract for differences on anything you want. But, if you’re going with these brokers, it will be for financial instruments.

 

How do CFDs work?

It’s straightforward to explain CFDs if you contrast them to shares.

 

For example, if you want to buy Netflix shares. Then, you’ll have to go to the New York Stock Exchange and buy some shares. These shares will be deposited into your account. So, you’ll have a percentage share in Netflix. Your shares will enable you to own a percentage of the assets, and they have an intrinsic value. In this way, you’ll be able to become a Netflix shareholder.

 

But CFDs are entirely different. They’re a contract between you and the broker to bet on the share price of, for example, Netflix. So you can buy CFDs, which means you’re betting on going up by going long, or you can take a short position or sell and bet on the price going down. Here, you’re not a shareholder of Netflix. You don’t own any Netflix shares, but you’re simply betting on the price movement of the shares, and your contract is with the broker.

 

The broker isn’t the person you’re trading with; they’re not taking the opposite to your trade. They’re just providing a service. So, they’ll provide a service for you to go long or short. They provide these services to hedge the position with actual shares. So, you’re not trading against the broker, but they’re just providing a service for you. They take their money in the spread between the bid and offer. So, they take a little bit of money when you trade, but they’re not taking the other side. You’re still selling in the market, which may happen physically on the back end of your trade to settle shares.

 

Why Trade CFDs?

So, why trade CFDs and not just go for other alternatives like stocks? It enables you to trade on stocks that aren’t in your currency. For example, if you’re in South Africa and want to sell American shares. It’s challenging, and you’re going to buy in dollars, and you’re going to have lots of different accounts as well.

 

But, with CFDs, that’s simple. You can trade in your currency. You can open and close trades exceptionally quickly. So, it’s an advantage to deal with shares outside your country.

 

Remember, because you’re just betting on the price movements of those shares, you’re not holding the shares. So you don’t need to go through all of the nonsense of trying to open up accounts and hold shares from different exchanges in different currencies.

 

One of the other benefits of CFDs is leverage. This is a benefit or a drawback as well. Let us explain this feature of leverage: When you put money into an account with a CFD provider. They will loan you more money on top of that. That’s because they move little in percentages when you trade these instruments.

 

So, if you’re a small trader, just putting in a small amount of money, you won’t get significant returns. But CFD providers give you leverage. For example, if you put $ 10,000$ in your account, they may give you $ 50,000$ worth to trade with. Let’s say you have 10,000$ to change without any leverage. If you bought $ 10,000$ worth of CFDs and the price went 5% up, you would make $ 500$. But with leverage, you get five times leverage. So you put $ 10,000$ in the account, have $ 50,000$ worth to play with, and you make 2500$ instead of 500$.

 

You can see that with leverage, you can increase your profits, which works the same for the downside.

 

So, with your leverage, your gains or losses are amplified. Some people see leverage as the main benefit, but this is the main risk of CFDs. It’s not a risk of CFDs as much as it is a risk of using leverage and playing with much more money than you have.

 

 

How to trade CFDs?

When you trade CFDs, they’re sold in units, and one CFD is usually the price of the stock that you’re selling.

 

For example, if a stock is valued at 100$ per share, then you can take out a CFD contract at 100$. If you want to buy more shares, two would be 200 $. Then,  you take out two units. It’s the same contract, but now you’ve two units worth 200$. The more units you buy, the more shares you buy, and the larger the contract will be.

 

With CFDs, the amount of margin you need on an account differs. Stocks that stay the same and are very liquid may have smaller margins. So you get lent more from the CFD broker. As shares get riskier, smaller, and less liquid, you may need to put way more margin on the account because the broker is willing to lend you less for that stock.

 

The benefits of CFDs are global access to instruments, shares, indices, and commodities that you would otherwise not have very liquid access to. You can trade virtually anything easily and in your currency, and you have leverage, which can be a benefit that is undoubtedly the most significant risk.

CFD Trading Strategies

Here, we’re going to talk about CFD strategies broadly. Let’s jump into it straight away.

 

1.   Fundamental Approach

The fundamental approach refers to analyzing the specific Company and its pros and cons and then deciding based on fundamentals. That could be a bearish thesis as well!

 

That’s the beauty of CFDs: you can bet in a downward direction. You can think about a specific Company over the next year. So, you take your position and profit from a downfall in the market.

 

2.   Short-term or Long term

You decide whether to be in and out in a day (Intraday Trading) or to be a swing trader. You know what’s your time frame. So, that’s something you’ve got to be comfortable with, which suits your personality as a trader.

 

If you’ve opted for a fundamental trading approach, short-term trading doesn’t suit you much—the whole approach best suits long-term traders.

 

3.   Pair Trading

Pair trading is among the most popular trade methods with more significant funds. That’s because it dampers down volatility and reduces risk, and it’s a different approach.

 

With pair trading, you’re playing the difference rather than having a directional play on stock. So, you might go long, or you might go short. You’re playing the difference rather than speculating on the direction of that particular stock sector.

 

4.   Stock Picking

You can pick a stock you think is going to outperform or underperform. Let’s say you’re looking at the Tech sector, or let’s say you’re looking at gaming, consumer goods, utilities, or whatever industry you choose.

 

You can have a portfolio of trades because of leverage and margin. You might only be able to afford to purchase one trade. If you have 1000 $, then you might be able to buy one position or two positions 500 $ each. But with CFDs, you can even open 10$ positions of 1000$ each.

 

And, of course, you can have some long and some short positions and a neutral portfolio. So, there are many options you can play on.

 

5.   Technical Analysis

Technical analysis is popular with short-term traders. Tech analysis is looking at prices and charts. Based on price patterns and chart analysis, you can predict the trend to take your position.

 

6.   Price Action

Price action is a hybrid approach. It’s about how I view the price, what’s happening, and what I expect participants to do next using charts, technical analysis, and some short-term fundamentals as catalysts. So, it’s a hybrid strategy for traders.

 

 

Best CFD Trading Brokers in South Africa

We’ve listed some of the best CFD trading brokers in South Africa. This list is based on Metatrader 5 (MT5), which is considered to be the best platform when it comes to CFDs. The second reason behind selecting these brokers is the excellent number of CFDs offered.

 

1. FP Markets

FP Markets is on the top of the list primarily based on their range of markets. They offer a good range of Forex trading. Many traders often track currencies, but some also trade shares, indices, and energies.

 

So, if you look at the FP Markets website, you’ll see a diverse range of markets, including bonds, commodities, shares, and cryptocurrencies. In addition, their fees are competitive, they have good customer support, and they have global regulations.

 

2. Pepperstone

Pepperstone not only provides a range of markets but also offers one of the fastest speeds. They have an award-winning customer service. They offer a wide range of trading platforms, such as MT5. Regarding the Trust factor, they’ve got plenty of licenses from institutions like the Financial Sector Conduct Authority (FSCA). So Pepperstone can be trusted.

 

3. IC Markets

IC Markets is recommended if you’re looking to open a standard account. The recommendation is based on the ECN account. That’s an account where you have spread plus a commission.

 

Now, there’s a second type of standard account, where there’s no commission, and it’s only spread. The advantage of a joint account is that you know your brokerages. So you don’t have to factor in that extra commission after the trade. You know how much it’s going to cost when you’re trading.

 

4. BlackBull

BlackBull has the fastest execution speed. So, if you’re looking for the quickest speed because you don’t want to slip, BlackBull might be a good option. They provide excellent trading experience, and they also offer higher leverage. Their maximum leverage is 500 into 1, which is significantly increased. So, if you’re looking for a broker that provides high leverage, that’s BlackBull.

 

All of the above  CFD trading brokers are legal in South Africa. You may have noticed a common theme: we’ve talked about regulations, commissions, and fast execution speed. These are all fundamental concepts when it comes to trading. You may want to know what your costs will be, and you want to keep your costs to a minimum. So, the brokers mentioned above solve all of these problems.

 

Now, if you want to select these CFD trading brokers, at least you have the confidence to know that they offer a good range of CFDs to trade and are trustworthy.