CFDs

Contracts for difference (CFD’s) are issued directly to you by SA Derivatives (Pty) Ltd and are not regulated or guaranteed by the JSE Limited or by the Financial Services Board.

SA Derivatives (Pty) Ltd acts as the counterparty to your transaction. In other words, your trade and related responsibilities and any claims that you may have are between you and SA Derivatives (Pty) Ltd.


What is a CFD (Contract for Difference)?

A CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (If the difference is negative, then the buyer pays instead to the seller). In effect CFDs are financial derivatives, that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.

A CFD is a margined, over the counter, derivative instrument with a listed equity, commodity or index, as its underlying asset, where the holder participates in market movements of the underlying asset, as well as in dividend income.

The issuer of a CFD requires a cash security deposit (Margin) from the holder as a deposit of good faith to cover market movements as well as interest, commissions and dividend settlements.


How does it work?

The CFD is started by making an opening trade (Buy/Sell) on a particular instrument. This creates a ‘position’ in that instrument. There is no expiry date. Once the position is closed, the difference between the opening trade and the closing trade is paid as profit or loss.

Even though the CFD does not expire, any positions that are left open overnight will be ‘rolled over’. This typically means that any profit and loss is realised and credited or debited to the client account and any financing charges are calculated. The position then carries forward to the next day.

Example

Step 1 Opening a Position   
Buy 500 Anglo American Shares a Offer Price (AGL)  500 x R270.00 = R135 000
Margin Requirement is: Open Position x Margin Percentage (15%)  R135 000 * 0.15 =  R20 250
You get charged commission of say 0.1% on this transaction R135 000 * 0.001 = R135
Step 2 Overnight Financing  

To hold this position, a financing charge is made each night.
Assume price of Anglos did not change and no P&L was recorded.

R135 000 * 0.000194 = R26.15
Step 3 Closing the Position
 

The next day, Anglo shares have risen by R3.00 The trade is in
your favour and you close the position to take profit.

 
 Sell 500 AGL shares at Bid Price of 273.00  500 * 273.00 = R136 500
Your position is now closed, and so margin requirement is zero.  R0.00
Commission charge of say 1%  R136 500 * 0.001 = R136.50
Gross Profit is difference between opening position and closing the position  R136 500 - R135 000 = R1 500
Net profit is gross less costs. Costs are commissions and overnight
financing
 R1 500 - R135 - R136.50 - R26.15
= R1 202.35

 
In summary you have had to deposit R20 250 to cover margin on this trade, and made a profit of
R1 202.35. If the price of AGL has instead dropped, you would have sustained a loss of R1 500.00 plus R297.65 (Commissions)


Long or Short

The holder of a long/(short) CFD will gain/(loose) from a positive market movement in the underlying asset and will receive/(pay) any dividends declared by the underlying equity. 

The holder of a long/(short) CFD will pay/(receive) interest to/(from) the issuer, calculated on the nominal value of the underlying asset, for the opportunity to hold(be short of) the leveraged exposure. 

The holder of a long/(short) CFD will receive/(pay) dividends in their cash account on the official ex-div date and the funds will be available for withdrawal two business days after the dividend payout date of the underlying equity.


CFDs Risk

The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources. You should be aware of the following points:

  • If the market moves against your position, you may, in a relatively short time, sustain more than a total loss of the funds placed by way of security deposit. You may be required to deposit a substantial additional sum, at short notice, to maintain your minimum security deposit balance. If you do not maintain your margin balances your position may be closed out at a loss and you will be liable for any resulting deficit.

  • Under certain market conditions it may be difficult or impossible to close out a position. This may occur, for example, where trading is suspended or restricted at times of rapid price movement.

  • Where permitted, placing a stop-loss order will not necessarily limit your losses to the intended amounts, for market conditions may make it impossible to execute such orders at the stipulated price.

  • A spread or straddle position may be as risky as a simple long or short position and can be more complex.

  • Markets in Contracts for Difference can be highly volatile and investment in them, carry a substantial risk of loss. The high degree of "gearing" or "leverage" which is obtainable in trading these contracts stems from the payment of what is a comparatively modest security deposit when compared with the overall nominal value. As a result a relatively small market movement can, in addition to achieving substantial gains where the market moves in your favour, result in substantial losses which may exceed your original investment where there is an equally small movement against you.

  • This brief statement cannot disclose all risks of investment in Contracts for Difference. They are not suitable for many members of the public and you should carefully study such investments before you commit funds to them. They may also have tax consequences and you should consult your lawyer, accountant or other tax advisor in this regard.


Managed Accounts

We offer our clients the opportunity to have a CFD portfolio managed by our team of experienced portfolio managers. The minimum amount to invest is R100 000.

Should you have enquiries, please contact us on 011 214 7250 or marketing@sastockbrokers.co.za



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