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What is the definition of a CFD?
A CFD is a Contract for Difference. A contract for difference is a contract between a buyer and a seller that stipulates that the buyer must pay the seller the difference between the closing value of an asset and its value at the opening of the trade.
CFDs allow traders and investors an opportunity to profit from price movement without owning the underlying assets.
If the trader was to go long (BUY) the underlying asset and the price goes up, when the trade is closed, the CFD broker will pay the difference between the opening and closing levels. If the trader was to go long (BUY) the underlying asset and the price goes down, when the trade is closed the trader will pay the difference between the opening and closing levels.
Figure 1 Pepperstone CFD trading
CFD has risen in popularity
With the onset of COVID-19, and with the lockdown policies around the globe, online investing from retail traders increased dramatically. According to a Charles Schwab survey, 15% of the current retail investors started their trading journey during 2020.
What makes CFD trading attractive to retail investors?
Let us look at some of the benefits of CFD trading in South Africa.
Margin Trading
Margin trading is when the investor borrows money to gain greater exposure to trade assets. Using leverage or margin can effectively increase the size of the trade(s) you can undertake.
The current leverage on offer at Pepperstone South Africa is 30:1. That means that for every South African Rand (ZAR) that you hold in your trading account, you can trade 30 ZAR.
Want to know how much margin is required for an asset you are interested in trading? Pepperstone offer a margin calculator in their secure client area.
Going long and short
In conventional share trading, you only have the option to buy a stock, hold and then sell. Trading CFDs gives you the capability of speculating on the value of an asset going down as well as up.
Cost effective
Trading CFDs can be cost effective compared to conventional share trading. There are fees payable, such as the spread and overnight funding. A document highlighting Pepperstone costs and charges can be seen here.
Variable Trade Size
You pick your trade size. In CFD FX Trading, a standard LOT is 100,000 units of the main currency. In a EURUSD trade that would be 100,000 units of US dollars.
However, most CFD platforms will let you choose your lot size with some offering micro-lot trading.
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The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.