In recent years, CFDs have gained popularity in South Africa. In comparison with futures, these derivatives are more accessible and convenient to trade. They do not involve physical delivery. Through CFDs, one can speculate on prices for stocks, commodities, currencies, and other assets. To start, you need knowledge of the market and only a modest investment.
CFDs can bring returns, but they are seen as a risky instrument. This is largely due to their leveraged nature. Still, this does not prevent many traders from managing CFDs successfully. CFDs are extremely varied. Traders with diverse portfolios use them to hedge risks and generate higher returns. Here is a close look at CFD trading.
Definition of CFDs
Contracts for Difference are derivatives. This means they allow you to profit from the underlying asset. Physical ownership is not involved: CFD trading is purely speculation-based. It is possible to benefit from stocks, commodities, or cryptocurrencies without owning any. Today, international brokers offer the following options:
- CFDs on commodities, such as crude oil;
- CFDs on stocks of the largest corporations;
- CFDs on stock indexes like S$P 500;
- CFDs on cryptocurrencies like Bitcoin.
So, what ‘difference’ does the term refer to? Each contract is your agreement with the broker. Holders of CFDs may sell their instruments whenever they like. They make a profit or loss depending on how the price for the asset has moved.
The broker pays the difference between trade entry and exit. Investopedia defines the tools as “an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.”
Pros and Cons
So, why not invest in the same assets directly? CFDs have certain benefits in comparison with older investments.
- First, any market trends can be profitable. Like Forex players, both long and short positions are allowed. Depending on the situation, traders may short-sell their CFDs or buy more to capitalize on future growth.
- Secondly, they are cheaper. Buying the asset outright will cost you much more. Brokers like Forextime offer affordable market entry: accounts for CFD trading require a minimum deposit of $100. This is incomparable to entry to the physical stock exchange.
- As CFDs are virtual instruments, they are easy to trade online. Modern platforms and apps, such as MetaTrader 5, allow access 24/7, even on the go.
Finally, CFDs are highly leveraged instruments. They can bring high returns, as well as high losses. Trading on margin is an attractive opportunity. However, it must be used with extreme caution. A badly timed trade can wipe your account immediately. Other disadvantages include:
- relatively wide spreads,
- potential liquidity issues,
- lack of industry regulation.
Prerequisites for Success
If you want to trade CFDs, begin by choosing a trusted brokerage. This will ensure that your investment is safe. Today, fraud is not uncommon. Some websites advertise broker services but are actually set up by cybercriminals.
1. Is the Broker Regulated?
Does their website include information about licenses, registration, and contact details? In South Africa, global brands like Forextime have an advantage. Their business is supervised by industry watchdogs like the CySEC or the FCA. Reliable companies take pride in their reputation, and they share details of their licenses.
2. How Much Do Their Services Cost?
All fees and commissions must be transparent. Steer clear of firms whose pricing is vague. Look for the best spreads. Specialized review sites can help you compare offers from different brokers.
3. What Tools Do They Provide?
The quality of your trades can be affected by the platform or app used. MetaTrader 5 is a leading choice, as it offers smooth trading and cross-platform functionality. There is a desktop, mobile, and web access. This means you can manage your trades any time and from any location. As web platforms work in browsers, no downloads are necessary.
4. Do They Offer the CFDs You Need?
If you want CFDs on stocks, make sure the broker offers this type of instrument. Some brokers charge fees for tools that their competitors provide for free.
5. Do They Offer Learning Opportunities?
In trading, education never stops. Reliable companies emphasize the importance of learning. They never pressure clients into live trading prematurely. You should have access to articles, tutorials, and more.
6. Is Support a Click Away?
Around-the-clock support is a sign of reliability. Make sure the customer service team is reachable when you need it. You should also have a choice of communication methods (e.g., email, phone, and Live Chat).
Making Money From CFDs
To conclude, profits in the CFD market are real. However, traders need to develop their skills and work consistently. Success requires patience and perseverance. Leverage can cause significant damage. Do not expect spectacular profit unless you work hard.