What is CFD Trading in South Africa?
There’s been an increase in popularity with CFD trading in South Africa. With an increase in brokers and trading platforms, a CFD trader has plenty of options to choose from.
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CFD Meaning Explained
CFD trading can get defined as the buying and selling of CFDs, with a CFD meaning, contract for difference. CFDs are over-the-counter (OTC) financial derivative products, allowing you to trade on currency pairs’ price movements. Forex transactions are mostly through a forex broker, but you can now use derivatives such as CFD trading.
CFDs are leveraged, allowing you to open positions for only a small portion of the total trade’s value. You don’t take possession of the asset but instead, take a position believing that the market’s value will rise or fall.
Price fluctuations can get traded freely 24/5. You won’t own the underlying asset or get any obligations or rights relating to the underlying asset.
However, there is a downside. Your losses can increase because of leverage if there’s a loss with the currency you’re buying.
How CFDs Work
There are four concepts behind CFD trading, namely spreads, deal sizes, durations, and profits and loss.
There are two prices that CFD prices get quoted on – the buy price and the sell price.
- The buy price also referred to as the offer price, is the price at which you open a long CFD. A buy price is always slightly higher than the current market price.
- The sell price, also referred to as the bid price, is the price at which you open a short CFD. A sell price is always somewhat lower than the current market price.
Size of the Deal
CFDs get traded in standardized contracts, also known as lots. An individual contract’s size depends on the underlying asset getting traded.
Unlike options, CFD trades have mostly no fixed expiry. Instead, you close a position by placing a trade in the opposite direction to the one that opened it. You’ll get charged with an overnight funding charge if you leave a daily CFD position open after the daily cut-off time.
With an expiry date at a time in the future, a forward contract will have all the overnight funding charges included in the spread already.
Profit and Loss
The formula for calculating profit or loss:
(Total number of contracts X value of each contract) X (closing price – opening price)
To get a full calculation of a trade’s profit or loss, any charges or fees you paid must get subtracted. These fees include commission, overnight funding charges, or guaranteed stop fees.
CFD Trading Strategies
You can use one of the many trading strategies when trading CFDs, with Long and Short being the most popular trading methods.
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A long position occurs when a CFD trader places a buy trade. This is with the expectation that the asset will rise in value over time. Hence, the trader will buy at a low price and sell when the price increases.
A short position will occur when a trader suspects the assets’ value will decline and selects a sell and to repurchase the contract back at a later stage. The trader will profit from selling at a higher price and repurchasing it when the price drops. This is a huge benefit for trading CFDs, as you can trade them even if the market falls.
The Benefits of CFD Trading
- Leverage trading: Considerably less capital is needed to open a trade compared to owning the underlying asset. Leverage can increase your losses and gains.
- There are no exchange fees: You don’t own the underlying assets, and you don’t get their rights or obligations.
- Trade on rising and falling markets: According to your trading strategy and the market conditions, you can open either long or short positions.
- Multiple investments – You can trade various instruments from the same platform.
Is CFD Trading Legal In South Africa?
Trading CFDs in South Africa is legal. CFD and forex trading both get regulated by the Financial Sector Conduct Authority (FSCA). Some brokers who trade with CFDs in South Africa get regulated by other established authorities, such as the UK Financial Conduct Authority (FCA).
Tax Implication Trading CFDs
Profits from CFD trading gets seen as gross income by the South African Revenue Service (SARS). According to the Income Tax Act, the tax will get paid. You can also deduct expenses from your gross income.
You will find it easy to declare your profits each year if you keep a detailed record of all your trades throughout the year.
How Much Money do You Need for CFD Trading?
The more you deposit, fees, leverage options, and trading tools available become more competitive.
There are countless resources available for both beginners and experienced South African CFD traders. The Johannesburg Stock Exchange (JSE) has ample reading material for you to go through.
Do your research before you do any form of trading, and once you’re ready, you can practice with a demo account. A demo account provides you with the chance to trade with fake money on a live platform.
Conclusion – A Word of Advice
CFD trading is popular and legal in South Africa. There are many ways to trade, whether online or through a regulated broker; you have many options to get started.
Like with all investments, CFD trading comes with risks. Educate yourself and practise until you’re comfortable with a demo account.
Remember that you should always only trade with money you can afford to lose.
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Heinrich is a Forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best Forex Brokers in South Africa. Join him on his Journey!
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