What is CFD Trading
CFD (Contract for difference) is a contract or a financial accord between two parties i.e., a seller and an investor where the seller demands the investor must pay the seller the difference between the current day value of an asset and its value at the time of contract.
The price point value of a CFD contract does not consider the asset’s intrinsic value, rather only the price change upon the entry and exit points in the market.
CFD Trading in South Africa
CFD trading has been gaining popularity in South Africa and is listed on the Johannesburg Stock Exchange as a single future stock. Availability of CFDs is distributed among stock market, foreign exchange market, commodity, crypto, futures market, options and more.
Legality of CFD in South Africa
South Africa’s Financial Services Board (FSB) oversees CFD trading proving that CFD trading is legal in the country. In addition to that, other regulatory bodies including Cyprus Securities & Exchange or CySEC and the UK Financial Conduct (FCA) overlook the ordinance of cfd trading south africa.
So as an outcome traders and trading bodies operating in South Africa benefit from the legal protection of numerous trusted authorities.
Advantages of CFDs
There are advantages to owning CFDs in comparison to other tradable commodities and stocks.
CFDs provide higher leverage than traditional trading. Lower margin requirements mean less capital outlay for the trader and hence, greater potential returns can be retained.
Global Market access
Most CFD brokers and traders offer around the clock access to products in all of the world’s major and leading markets. Investors can trade CFDs on a broad range of worldwide markets.
Zero Shorting Rules
CFD instruments and indicators can be shorted at any given time without having to incur any sort of borrowing costs since the trader does not own the underlying asset. In comparison some markets have rules restraining shorting, having the trader to borrow the instrument before selling it short.
Zero Day Trading Requirements
Certain markets suggest a requirement of minimum amounts of capital to day trade or place limitations on the number of day trades that can be executed within certain trading accounts.
CFD markets are not bound by such limits; traders can engage in day trading on all accounts as they wish. Accounts can just be opened with a preferred amount of choice.
Professional Execution with Zero fees
CFD brokers offer many of the same order types as traditional brokers such as stops, limits and contingent orders. These traditional brokers offering guaranteed stops will usually charge a fee for the service or recoup costs another way.
Since CFD traders do not directly engage in the purchase of the asset; this fee becomes negligible.
Variety in trading Opportunities
Brokers offer stock, index, treasury, currency, sector etc. This allows speculators interested in diverse financial instruments to trade CFDs as an alternative to exchanges.
Disadvantages of CFDs
There are some downsides to owning CFDs, namely:
Traders Pay the Spread
Although CFDs offer an attractive alternative to traditional markets, they also present with potential risks and pitfalls. For instance, having to pay the spread upon entries and exits in the market eliminates the potential to profit from all small moves.
Hence, while traditional markets expose the trader to fees, commissions, regulations and higher capital requirements. CFDs trim traders’ profit through spread costs.
CFD trading is fast and requires close attention and monitoring. There are liquidity risks and margins you need to maintain. Leverage risks expose you to greater profits but on the same hand expose you to greater chances of loss as well.
While stop-loss limits are available from many CFD providers, they still cannot guarantee that you will not suffer any kind of losses at all. Execution risks may also occur due to lags in trades.
How to Choose a Broker
When it comes to choosing a broker to engage in CFD trading; one should consider brokers offering competitive fees, an easy account opening process and an intuitive platform for you to regulate the trade as well.
Side by side you should go for a broker that offers excellent educational tools and a social trading environment as well.
Tax Deductibles on CFD
When it comes to opening an account with a broker one should get acquainted with how CFD Taxes are accounted for in South Africa. The South African Revenue Services or SARS treats profits and returns from CFD trading a gross income, suggesting tax may be payable under the Income Tax Act.
Record keeping of trades and relevant details will aid the declaration of profits on yearly tax returns easier.
CFD trading is popular among retail investors and is completely legal in South Africa. There is an array of reputable local brokerages and trading platforms on the market. As you make the decision to invest in CFDs all of the above-mentioned factors should be taken into account before you open an account.