May 21, 2024

Advantages and disadvantages of CFD trading in South Africa

May 21, 2024

CFD Trading
Content:

 

Contracts for difference are quite interesting for a lot of traders looking for potential profits. The margin requirement is not very high, and you can find some very interesting trading opportunities if you open a CFD trading account. That does make you wonder, are there any pros and cons for trading CFD in South Africa? A lot of people are looking to learn how to do CFD trading and whether this can be challenging or profitable. We are here to shine some light on that, while offering better insight into what challenges can arise.

What is CFD trading?

The contract for differences is a contract made between buyers and sellers. In the CFD contract, you have the buyer stating they will pay the difference between the asset value that it has now and the one at the contract time. With CFD trading, you can get quite a bit of profit because you can access the potential price increase and not even own the asset. The CFD value is not considering the value of the asset, just the price change.

So you can have the product trade entry price be one, and then it can change. That’s great for short position trading and people that enjoy profits from quick financial derivatives. Over the years, many CFD brokers were able to make a significant amount without investing way too much. So it can be a great idea, and it can provide excellent benefits, if you do this right.

Can you trade CFDs anywhere?

No, and that’s the thing. If you want to focus on trading CFDs vs futures vs options, then you should know if CFD trading is even allowed in your area. For example, CFD trading is not allowed in the US. However, the UK, France, Spain, Germany, Australia, Thailand, Canada, South Africa and many other countries allow CFD trading. So yes, you can perform CFD trading legally, however if you move to another country, that might not always be the case.

Another thing to consider when it comes to CFD trading is that trading does come with a commission, spread and cost. So aside from the trading process itself, you will also have to deal with some fees too. All these things might not seem like a lot at first, but for the most part, you might encounter a few challenges here and there. In the end, you always want to fully understand the process and narrow down any possible issues or challenges that can arise.

The upsides/benefits of CFD trading

You have global market access from a single platform

A great benefit for CFD traders is the fact that most brokers offer products from international markets. That means you can have access to CFD trades around the clock, which is always a major benefit to take into account here. Another thing to consider is that you also have access to other people that want to buy and sell CFDs worldwide.

It just adds more appeal because you are not limited to the local market. However, there is also the downside of still having limited markets to deal with, since there are legal blocks for trading in some countries. That’s the reason why you always want to consider everything and narrow down both the pros and cons for each situation.

A higher leverage

When you are trading CFDs, you will have a higher leverage when compared to traditional trades. The CFD market leverage is usually subject to the regulation. It was 2% at one point, however now it’s at a limit of 3%, yet it can go up to 50% in some cases. When you see lower margin requirements, that means the potential returns can be higher.

But you also want to study every CFD investment opportunity, because it can also be risky and end up bringing losses too. At the end of the day, CFD trading can be great and with a good leverage, but it won’t be risk-proof. So you still need to perform your due diligence and study the opportunity to see what delivers the best value.

You have a better set of alternatives

There are tons of CFD options you can trade. You can have commodity, sector, currency, treasury, index or stock CFDs. That means you have a variety of different CFD types you can trade, and those can be quite a solid investment, if you do it rightfully. Yet at the same time, you can use the CFD trading process as an alternative to exchanges and other similar solutions.

There are no day trading requirements

Another thing that we like about CFD trading is that you don’t have to deal with day trading requirements. Yes, there are certain markets that will end up requiring a minimum capital for day trading. In some cases, you might even have limits that end up being made due to the location or the type of account you have.

What we like about the CFD market is that it’s not bound by such restrictions in any way. The account holders can easily day trade if they want. There are still some minimal trading requirements, but are not forced to have any specific capital, which is exactly the thing that you want to think about here.

Working with a CFD broker will deliver great value without large fees

Yes, there is an option here when you don’t have to worry about fees, since brokers tend to make money when the trader pays their spread. There are some brokers that will end up charging a fee for their service, others will just take their fee from the spread. But a common denominator here is that the fees as a whole are not very large. And that’s a good thing, because you are getting a much better outcome and a great experience, without worrying about massive fees that you are forced to pay.

No need to borrow stock

Some markets will end up prohibiting shorting and they might force the trader to borrow the instrument before selling. Thankfully, CFD instruments can easily be shorted and you don’t have to borrow costs. That’s a great benefit, since it allows you to focus on finding the best trade option and increase your profits. It can still vary from market to market, but the need to borrow stock is generally not mandatory, and that’s the thing you want to consider in this particular situation.

No stamp duty

Many investing options will require you to pay stamp duty. In the case of CFD trading, you don’t have to worry about stamp duty costs. Those can affect your financial situation because they do add up the more trades you make. However, even if you have some high risk at times, at least you don’t have to deal with stamp duty for CFD trading. The reason why this happens is because the investor doesn’t directly own the asset, so the stamp duty requirement is not mandatory here.

Great liquidity

If you want to trade CFDs in South Africa, one of the most appealing things for it have to be liquidity. You can have very good liquidity in the underlying market, and that can be a major benefit. You can easily get out of the trade because there are plenty of ways to sell your CFDs and even make a good profit. Plus, you have CFDs being tradeable on a margin too, which also adds to their liquidity.

Tax efficient trading system

Yes, if you want to do CFD trading, you will notice that many of the costs related to investing like interest repayments can be deducted. Of course, that doesn’t mean every single cost can be deducted, but some of them can be and that’s what makes it such an excellent option to consider here.

Great transparency

Transparency is also a very important part of CFD trading, because you can see what is being traded, there are no hidden fees either. You still have to check the market you are trading in and its requirements or mechanics. But for the most part, all markets are very transparent, which adds to the value of CFD trading.

CFD Trading

The downsides of CFD trading

The risk can be high sometimes

Yes, CFD trading can be very risky at times, because even if you don’t have to deposit the entire value, you can lose money if the market is moving against what you thought. These things do happen sometimes, and you can only prepare so much for that.

Overtrading can be an issue

In some cases, you will find some investors that find CFD trading very appealing due to the low capital requirements and ease of access. You must perform your due diligence and ensure that you are trading the right stuff. Otherwise, you can end up overtrading, which in turn will only lead to problems down the line.

Interest is payable for the entire transaction

In the case of margin lending, you just pay the interest for that particular margin. But in the case of CFD trading, you must pay interest for the entire transaction. That can add up if you stick solely with CFD trading or you perform lots of trades in this niche. Sure, it’s not a dealbreaker, but it’s certainly the type of thing that you must consider if you choose to trade within this field.

CFD trading rules vary worldwide

Some countries like the US will not allow CFD trading. Other countries allow it, but there are restrictions. So again, you must assess the situation and perform your due diligence. You want to ensure that CFD trading is legal in your country and if there are any specific limits, you need to know about them. With that in mind, CFD trading is allowed in South Africa.

There’s a counterparty risk too

Generally, CFD trading will also require you to contract with a broker. So yes, if you find the wrong broker, that can be a huge downside. You might end up losing a significant amount of money, which is why you can’t just pick any random broker. Making sure that you select the right broker can assist you immensely, and it will provide a great experience in the end.

You don’t have rights as a shareholder

If you are into CFD trading, then you don’t own the asset and that means there are no rights as a shareholder. You don’t have any say, the idea for you is to just make a bit of money due to the price difference of the asset. But you have no control or leverage over the asset.

You need to have a collateral sometimes

In some cases, CFDs will come with a collateral requirement. If the position moves against you, that can reduce the cash balance. So even if it might not seem like a problem at first, it can definitely become one in the long run. That’s why we highly recommend avoiding any rush when you trade CFDs, just so you can be on the safe side.

 

Should you consider CFD trading in South Africa?

There will always be a debate when it comes to CFD trading in South Africa, if it’s a good idea or not. What we do know is that you are legally allowed to perform CFD trading in South Africa, but at the same time, you can also encounter lots of risks. Finding the right broker and studying the market quite a bit will help you diminish those risks and ensure you have the best results in the end.

Yes, trading CFDs in South Africa can be an amazing idea and a very profitable one. But you always have to realize that you must know what you are getting into and what results you can expect. At the end of the day, there’s nothing better than just assessing your requirements and needs, and then narrowing down on what works for you. Rest assured that CFD trading can be very effective, but you need to educate yourself when it comes to potential downsides too!

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Disclaimer
Trading involves a significant risk of loss and is not suitable for all investors. It’s important to understand the risks and seek advice from an independent financial advisor if necessary.

The information provided here does not constitute investment advice.

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