CFD trading, short for “call option for difference” trading, is an investment technique that involves trading shares of underlying financial instruments (like stocks or ETFs) with the difference between the strike price and the value at the contract date.
CFD trading, thus, is quite different from conventional stock trading. But what makes a CFD so different is the fact that you don’t own the underlying instrument; instead, you purchase or sell a derivative contract for difference (“CFD”) on an exchange-traded note (“OTC”).
There are many reasons why CFD trading south africa makes sense. One is that CFDs reduce risks related to fluctuating market prices. For example, when there is a sharp drop in market prices, whether it is on the short or long side, CFD transactions minimize losses by minimizing potential losses resulting from the sharp drop. Another advantage of CFDs is their transparency. CFDs are traded on major stock exchanges, so the transparency factor is not a question.
One of the biggest reasons why traders prefer to go long in CFD trading instead of in stock trading is transparency. Stock market hours are fixed, which means that you can trade during regular business hours in any place across the globe, even if the market is open in your hometown.
CFD trading can be done 24 hours a day, seven days a week – which means you can manage your risk profile at whatever time of the day or night you want. You can use CFDs to trade during your lunch break when the office is closed down when you go shopping when your children are sleeping or at any other time.
CFD trading also offers more opportunities to trade shares of underlying assets, with the spread between the CFD and the underlying asset being determined by the contract length. This means that you don’t have to worry about how the physical share of the company will perform about the benchmark index or the security index you choose to trade-in.
CFD trading usually involves the ‘over-the-counter’ (OTC) nature of business – meaning that you trade with dealers you would otherwise find yourself dealing with if you were to go down to the local office of your broker to buy a share of stock or bonds. Because trading in CFD markets is done over the internet, there is no physical share storage, commission, or statutory fees attached to trades.
The other big difference between CFD trading and regular trading is the way the commission is charged. CFD trading companies do not need to charge a commission – they are normally paid by the CFD provider instead.
This means you end up saving money by avoiding the extra costs of dealing with commission fees. CFD providers usually charge a small setup fee and a margin fee for each trade. These fees are deducted from your profits, so the difference between what you pay for these services and what you would pay to a traditional financial broker is your profit.
CFD providers have to follow strict commission rules and this means that they have to charge a certain percentage of the profit made on each trade. If your spread is higher, you’ll pay more to CFD providers as well. If you have a short spread, this won’t affect your CFD trading profit figure too much. Your margins will be based on your capital rather than your purchase power.