What is CFD trading in South Africa?

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.