What is CFD Trading in South Africa?

There’s been an immense increase in the popularity of CFD trading in South Africa. With the emergence of brokers and CFD trading platforms, a trader has plenty of options to trade CFDs.

CFD Meaning Explained

CFD trading is 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 on 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: spreads, deal sizes, durations, and profits and losses.

Spreads

There are two prices that CFD prices get quoted on – the buy price and the selling price.

• The buying 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 CFD market price.
• The selling price also referred to as the bid price, is the price at which you open a short CFD. A selling 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.

Duration

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)

Any charges or fees you pay must be subtracted to get a full calculation of a trade’s profit or loss. These trading fees include commission, overnight funding, or guaranteed stop trading fees.

Best CFD brokers in South Africa for 2022

HFM (HotForex) – Best FSCA-Regulated CFD broker

HFM is a global CFD broker regulated by the FSCA, offering various CFDs, including Forex pairs, commodities, indices, shares, and cryptocurrencies. In addition to offering lightning-fast STP executions, HFM offers access to 1000+ complex instruments across all six accounts. Several symbols listed on the JSE have also been added to HFM’s portfolio, allowing South African traders to trade local shares. A Micro Account requires only 70 ZAR (5 USD) as a minimum deposit and spreads start at 1.2 pips on EUR/USD. All account types are available in unlimited demo versions at HFM for beginners. HFM Zero Spread Accounts offer spreads as low as 0 pips for a minimum deposit of 200 USD.

With HFM, you can trade MT4 and MT5 using any method, including the MT4 MultiTerminal, which enables you to manage multiple MT4 accounts from the same interface. The MT4 and MT5 trading platforms are available via the web, desktop, Android, and iOS apps. The HFCopy copy trading service is free, along with Autochartist and VPS services.

FXTM – best CFD broker for beginners in SA

With over 250+ instruments, including currencies, commodities, metals, stocks, and indices to choose from, FXTM is an award-winning CFD broker.

As a beginner, FXTM’s Micro Account, which requires a 50 USD minimum deposit and spreads starting at 1.5 pips, might be more appealing than FXTM’s Advantage Account with its 500 USD minimum deposit, 0 pips spread, and 4 USD commission. Traders looking to copy professional traders can copy Strategy Managers whose risk profile matches their own with FXTM Invest CopyTrading, one of the best in the industry.

FXTM offers a wide range of training materials, including videos, webinars, and a searchable glossary of new terminology. In addition to the chart reading videos, traders with more experience can watch different videos covering analysis topics. Several CFD brokers in South Africa do not offer weekend support, making it difficult for new traders to get started during the working week. FXTM is one of the few that does.

AvaTrade – best mobile trading experience

Trading on Forex, cryptocurrencies, commodities, indices, stocks, bonds, vanilla options, and ETFs is available at AvaTrade, a beginner-friendly CFD broker regulated by the Financial Services Commission of Australia.

With AvaTradeGO, you will get one of the best mobile trading experiences. AvaTrade has a local customer support team in South Africa, unlike many European brokers.

In the app, retail traders can access AvaTrade’s 1000+ CFD instruments and the AvaProtect tool, which provides short-term loss protection.

Market trends monitoring, zooming, and seamless synchronisation with AvaTrade’s web traders are also highlights of the app.

One of the best features of the Avatrade single account is its tight spreads – as low as 0.7 pips on EUR/USD for a commission-free account with a 100 USD minimum deposit.

MT4 and MT5 offer a maximum leverage of 1:400, EAs, indicators, scalping, hedging, and free access to the Trading Central dashboard.

FP Markets – the widest variety of CFDs

Forex pairs, stocks, metals, indices, commodities, and cryptocurrencies (Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin) are among the CFDs offered by FP Markets, an Australian CFD broker.

With low spreads and fast execution, MT4 and MT5 are available with ECN pricing. Direct exchange access and leverage of 20:1 are available for 10,000 global stocks on the CFD trading platform for FP Market’s CFDs.

A minimum deposit of 100 AUD is required to open an MT4 or MT5 trading account.

With an average spread of 0.1 pips (EUR/USD) and a commission of 6 USD round turn, the RAW Account offers low trading costs relative to the industry.

To open a retail trading account, you must deposit a minimum amount of 1000 AUD.

Additionally, IRESS trading accounts are subject to a brokerage rate, the IRESS platform fee, and an ASX market data fee unless a minimum monthly commission is met.

In addition to VPS and Autochartist, FP Markets also offers copy-trading via Myfxbook AutoTrade.

With the Traders Hub, beginners can get started with video tutorials and courses on CFD trading.

IG Markets – best CFD broker in South Africa

IG offers CFDs on over 18,000* markets, including indices, shares, Forex, commodities, and cryptocurrencies.

In some markets, CFDs can even be traded after hours so that you can capitalise on company announcements after market closing.

With CFD trading, you can trade on thousands of markets without having to invest large amounts of capital, whether you are new to trading or have prior experience.

It is important to note, however, that CFD trading is not suitable for everyone. Due to its leverage, losses can exceed deposits.

Therefore, understanding the risks of trading CFDs is especially important, as well as taking steps to prepare yourself.

CFDs have different costs depending on your chosen market, which is affected by factors like liquidity.

For all other markets, you typically pay a spread betting (the difference between the buy and sell prices) instead of a commission. You will also need a minimum number of contracts to open your position in every market.

There is also a small fee for overnight positions and guaranteed stops (if triggered), and specialist tools may have an additional fee.

What financial instrument can I trade with CFDs?

CFDs provide exposure to the following major financial assets.

Currencies:

Trading currencies in pairs against each other, such as the US dollar against the euro, gives traders a wide range of options. CFDs offer a wide range of currency pairs for traders to choose from.

Approximately $6.6 trillion is traded on foreign exchange markets daily on the global market. Therefore, the major currency pairs market is highly liquid, making it easy to get into and out of positions.

Shares:

In most major global stock markets, you can buy CFDs. Global equity CFDs trading worldwide in the second quarter of 2022 totalled 37.7 trillion US dollars, like the forex market.

The result is that you will have a wide range of highly liquid shares to choose from. In addition to large price movements, shares are also subject to volatility, which can offer traders many opportunities for gains and losses.

Indices:

These provide an overview of the market as a whole. For example, the index price is calculated by taking an average price for a collection of different stocks.

The Dow Jones and the S&P 500 are well-known examples in the US. By using CFDs, you can trade the overall stock market, or any other market, rather than trading individual shares or index components.

Cryptocurrencies: 

A variety of popular cryptocurrencies are available to trade, including Bitcoin, Ethereum, TRON, and NEO, with leverage.

However, the volatility of the prices magnifies the potential for large gains and losses. Cryptocurrency CFDs can prevent losses caused by cybersecurity breaches because you do not own the underlying assets.

Commodities:

Trading CFDs gives you access to many commodities, such as oil, gold, copper, and much more.

Even though commodities are influenced by many factors, including global demand and supply and political shocks, the economic cycle is also significant.

Because of this, commodities may be subject to sudden price movement, which could present trading opportunities.

Stock CFDs:

The bond market, also known as the fixed-income market, is one of the world’s largest financial markets because bonds are effectively IOUs issued by governments, companies, and other entities. With major stock market indices, you can access various issuers, just like with stocks.

Inflation and interest rates, along with the issuer’s creditworthiness, are key influences on the fixed-income market, which is typically less volatile than the stock indices market.

Interest rates: 

You can place CFD bets on future interest rates in a wide range of major global markets. CFDs on interest carry relatively attractive margins of 20% and low spreads compared to other products.

How to choose a brokerage?

Many CFD trading brokerages in South Africa offer competitive trading fees, easy account opening, and a user-friendly platform.

XTB is especially popular among South African clients because it offers low CFD stock trading fees and fast deposits and withdrawals.

One of the prominent players in South Africa is XM, which offers a hybrid account, a direct market access account, and a simple market maker account.

The City Index and IG offer competitive trading fees, excellent educational tools, and a social trading environment.

Platforms

In South Africa, several platforms are suitable for online CFD trading.

MT4 (MetaTrader 4) is the current market leader. In addition, L2 Dealer and ProRealTime are both popular software options.

Trading financial markets’ strategies will determine which one is best.

A trader should consider the following factors when choosing an online platform:

• An easy-to-use platform with a fast learning curve
• Mobile trading app with powerful features
• Pattern analysis and sophisticated charting
• Customers’ positive reviews of other traders
• Tools and alerts for comprehensive asset management

Tax

Understanding how CFD taxes work in South Africa is important before you open an account.

Profits from CFD trading are treated as gross income by the South African Revenue Service (SARS), which means tax may be due.

You can deduct expenses from your gross income. It will be easier to declare profits on annual tax returns if you keep detailed records of your trades.

Education

Traders in South Africa can access excellent resources, whether they are beginners or experienced.

Two useful PDFs published by the Johannesburg Stock Exchange and Standard Bank of South Africa describe how CFDs work and discuss trading strategies.

For traders looking for a more immersive learning experience than PDFs, online courses that use real-life examples can also be a good option.

Regulation:

Consider the regulatory environment in which a broker operates before choosing one. Globally, multiple regulatory bodies regulate to different standards.

The most trustworthy regulators are actively creating new regulations and enforcing existing ones.

A constant stream of warnings is posted, and companies that violate the rules are prosecuted.

These organisations are distinguished from their counterparts by their enforcement efforts. As far as regulators go, the FCA in the UK leads, ASIC in Australia follows, and MAS in Singapore follows.

Many of the best regulators regulate CFD brokers in South Africa, so we recommend choosing brokers they regulate. CMC Markets, Forex.com, Pepperstone, and IG Markets are CFD brokers in South Africa.

Trading conditions:

Traders need to know how much it costs to trade with each broker.

We focus on beginners starting their trading careers, examining the minimum deposit required for retail investor accounts and the cost of trading.

Regarding trading conditions, we particularly like Tickmill, Exness, and AvaTrade.

Minimum deposit: 

It is recommended that traders only deposit an amount they are willing to lose.

Due to the high risk associated with CFD trading, brokers that require traders to deposit amounts they cannot afford to lose are not a good fit for clients.

We value entry-level retail investor accounts that require less than $100 because it is almost impossible to start a Forex trading career with $5.

What makes a bad CFD broker?

Poor regulation

Ensure at least two highly-rated regulatory agencies regulate your broker.

Poor support

CFD brokers that provide 24/7 support and quickly respond to requests for assistance are the best choice.

Unclear costs

Understanding the charging structure is essential. Ensure that the broker offers competitive commissions and spreads.

A narrow range of complex instruments

You may want to expand your trading portfolio once you become a trader.

Counterparty risk

You contract with your broker when you buy or sell a CFD. Ensure that the company you’re dealing with is reputable.

If you deal with an unregulated or poorly regulated broker, you have little recourse if they go bankrupt or refuse to honour the contract.

Unsubstantiated claims

Traders should be wary of brokers who play down the risk of CFD trading or make wild profit claims.

Poor educational materials

Using a broker that can teach you how to trade CFDs can be extremely helpful if you are a beginner.

No demo accounts

If you are thinking about trading with your own money, you should spend as much time as possible working on demo accounts before you put any money at risk.

What are the advantages of trading CFDs?

CFD brokers offer many benefits, such as the ability to trade CFDs with leverage and access a large variety of assets.

The financial asset never needs to be physically delivered, so storage, security, and transportation costs are also reduced.

Leverage:

There is no requirement to put up the full value of the contract. However, you will still benefit fully from any gains.

The trader only had to deposit 5% of the contract’s value to leverage his money 20 times over.

A broker provides leverage of 20 to 1 (20:1). Generally, leverage ranges from 3% to 50% of the asset’s value. Margin or position margin refers to the amount you must put up (5% in this case).

Profit from falling and rising markets:

The price of an asset can rise by betting on CFDs (going “long” in the jargon) or fall by betting on CFDs (going “short”).

By selling CFDs at a higher price, however, you can fulfil the contract you made to sell them at a higher price by repurchasing them when the price drops.

Imagine, for example, that you believe ACME’s share price will fall to $9 per share. A broker offers a 20:1 leverage on selling 100 shares in ACME at the current price of US$10 a share.

As the trading day comes to an end, the price of the shares has fallen to US$9. You then buy them for US$10 each to fulfil your earlier contract so that you have CFDs to sell. You have now made US$100, or double what you spent.

Convenience:

You can trade CFDs in various assets without taking physical delivery, saving you money on storage, security, and transportation.

CFDs in gold, for example, allow you to profit from price changes without worrying about the security of storing the commodity.

Exposure to a huge range of financial assets: 

The one platform you use to trade CFDs gives you access to thousands of underlying financial instruments worldwide.

Tax advantages: 

Unlike traditional share dealing, a CFD trade does not require stamp duty as you do not own the underlying asset.

What are the disadvantages and risks of trading CFDs?

The use of CFDs in the financial markets offers tremendous potential for profits. Still, there are also significant risks that traders need to be aware of before investing their time and money into them.

The is a high risk of losing money when traders use leverage because it exposes them to greater potential profits.

As a result of the financial markets’ volatile nature, traders must constantly monitor their positions, resulting in wider spreads and higher trading costs.

Constant monitoring: 

Keeping an eye on your position at all times is essential to maintaining your position. In international markets, volatile and rapid price changes can cause your account balance to change quickly if they occur outside normal business hours.

You will automatically close your positions if there are insufficient funds in your account to cover these situations.

Market volatility and gapping:

A financial market can be very volatile, and its prices can rise or fall precipitously rather than slowly moving up or down. The phenomenon is called gapping, and it can affect traders significantly.

To limit losses, traders may use stop-loss orders. It is the process of specifying a price at which you will close out your position if the instrument’s price moves against you.

As a result of gapping, stop-loss orders may be executed at unfavourable prices, either higher or lower than expected, depending on your trades’ direction.

It is easy to take on too much risk: 

Leverage is a factor that makes trading relatively inexpensive, which makes it tempting for investors to take on more risk than they should.

In such a scenario, their remaining capital may not be sufficient to cover losses across the portfolio due to overexposure to the markets. CFD traders who don’t take caution can end up financially ruinous if multiple positions go wrong.

Are CFD brokers regulated?

There is a high prevalence of unlicensed, unregulated brokers, and many will register in jurisdictions with low regulatory requirements.

According to our recommendation, a CFD broker should always be regulated by at least one national authority.

These regulators set laws to protect citizens against financial scams and unethical business practices. Multiple national regulatory authorities regulate some CFD brokers.

Financial Conduct Authority (FCA) is the national regulatory authority in the UK. FCA-regulated CFD brokers protect traders by following these rules:

• Segregated retail investor accounts. It is a requirement for CFD brokers to keep the money of their traders in a separate bank account from their own. If a CFD broker goes bankrupt, traders can recover their money.
• Negative Balance Protection. In CFD trading accounts regulated by the FCA, traders cannot lose more money than they have on hand. As a result, brokers are not able to claim any negative balance.
• Leverage Limits. The FCA regulates CFD brokers and limits their leverage to 30:1. Therefore, traders cannot borrow more than 30 times their trading account balance from the broker.
• Regular Audits and Inspections. A global CFD broker regulated by the FCA is required to undergo an audit of its finances and a surprise inspection of how they operate. Brokers cannot cheat their beginner traders this way.

Globally, there are many regulators. Aside from the FCA, CySEC (Cyprus Securities and Exchange Commission) and ASIC (Australian Securities and Investments Commission) are the best regulators.

In the European Union, another excellent regulator is the European Securities and Markets Authority (ESMA).

In addition to negative balance protection on an account-by-account basis, ESMA’s rules restrict incentives to trade CFDs. They include a standardised high risk warning that includes a percentage of losses on a provider’s retail investor accounts.

CFD Trading Strategies

You can use one of the many trading strategies when you start trading CFDs, with long and short being the most popular trading methods.

Long Position

A long position occurs when a CFD trader places a buy trade. This is with the expectation that the asset will increase over time. Hence, the trader will buy at a low price and sell when the price increases.

Short Position

A short position will occur when a trader suspects the assets’ value will decline and selects a sell to repurchase the contract at a later stage. The trader will profit from selling at a higher price and repurchasing it when it drops. This is a huge benefit for trading CFDs, as you can trade them even if the market falls.

Benefits of CFD trading with a reputable broker 

• Leverage trading: Less capital is needed to open trade than owning the underlying asset. Leverage can increase your losses and gains.
• There are no exchange trading fees: You don’t own the underlying assets and don’t get their rights or obligations.
• Trade CFDs 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 are regulated by the Financial Sector Conduct Authority (FSCA). Some brokers who trade CFDs in South Africa get regulated by established authorities, such as the UK Financial Conduct Authority (FCA).

Is CFD trading taxable?

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 yearly if you keep a detailed record of all your trades.

How Much Money do You Need for CFD Trading?

Minimum deposits will vary between brokers, but generally, you can open a CFD account with a few thousand South African Rand.

The more you deposit, trading fees, leverage options, and trading tools become more competitive.

Educate Yourself

Countless resources are available for 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 allows you to trade 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.

FAQs 

Can I trade CFDs in South Africa?

The Financial Sector Conduct Authority (FSCA) regulates CFD trading in South Africa well and is fully legal. FSCA-regulated brokers or brokers regulated by other national regulators can offer CFDs to South African residents.

You should only open an account with a broker regulated by a top-tier regulator, such as the FCA in the UK or BaFin in Germany, to avoid scam brokers.

Can you get rich trading CFDs?

In the same way as other investments, CFD trading may generate hefty profits.

However, the experience of retail investors shows that retail CFD accounts lose money on CFD investments due to leverage.

Trading CFDs can provide rising and falling asset prices, but it may be better to build a diversified portfolio rather than seek stellar returns on one investment.

Is trading CFDs a good idea?

A CFD is a form of investment that does not require a lot of capital. Most CFD traders use leverage, meaning they borrow money from their broker to invest. If you tread cautiously and do not rely solely on CFDs as your only asset, trading CFDs can prove to be a good investment decision. It is common for professional traders to hold various assets in their portfolios and spend a substantial amount of time learning how to trade.

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