Nowadays, the financial market is the hotspot of investment as it offers everyone the same opportunity. Previously, only those with huge funds could trade the financial market. However, things have taken a different turn as investors with small capital can open positions bigger than their funds.
While there are several routes to invest or trade, Contract for Difference (CFD) tends to be more popular. CFD trading offers investors access to several financial instruments as they look to take advantage of price movement. Investors don't take ownership of the underlying asset as they speculate on the price movement.
In this write-up, we will explore everything you need to know about CFD trading. You will learn about what are CFDs, how to trade CFDs, and essential CFD trading strategies. Importantly, you will also understand how it works and the benefits of trading CFD today. If you are ready, let's get started.
TABLE OF CONTENTS
2. How Does CFD Trading Work?
3. Is CFD trading Legal in South Africa?
4. How to trade CFDs
5. What are the benefits of trading CFDs?
6. CFD trading strategies
7. Why Trade CFDs with PrimeFin?
9. Frequently Asked Questions (FAQ)
What is CFD trading?
What are CFDs, and how do they differ from other derivatives? In this section, we take a simple look at Contracts for Difference. Contracts for Difference (CFD) is a contract between a broker and a trader to exchange the difference of a financial asset. As a CFD trader, you don’t own the underlying asset physically.
However, you speculate on its price movement. In other words, you can profit on price in whatever direction on different financial markets, including commodities, forex, indices, cryptocurrencies, and more. CFD offers you a great deal of freedom when trading.
CFDs are leveraged financial products, meaning you trade on margin. Using leverage allows investors to deposit a small capital while opening a bigger position. You only pay an initial margin while your broker pays the total value of whatever position you open. Another way to see CFD trading is the increased buying power using little funds.
Nevertheless, CFD trading comes with dangers as it exposes you to increased risks. While you profit if the price moves towards your anticipated direction, you also lose if the trades go in the opposite direction. Regrettably, you can lose all your investment when trading CFDs.
Unlike your traditional trading, which involves buying an asset, CFD trading deals with the price difference of the underlying asset. Since CFDs don’t come with an expiry date, it is easy to differentiate them from other derivatives.
How Does CFD Trading Work?
We've already indicated that CFDs are leveraged financial products that allow traders to get large exposure without investing huge capital. It uses a concept called margin trading. Most times, you will come across the term "trading on margin." It is a phrase that means opening a large position using a small deposit.
We have two categories of margin when trading CFDs. You have the deposit margin and the maintenance margin. You need the deposit margin to open a position. Without the deposit margin, you can't open a trade. However, the maintenance margin ensures that the balance of your open position never goes below your funds in your account.
You will receive a margin call once your loss exceeds your deposit margin. In this situation, you need to add an additional deposit if you don't want your position to liquidate. If you fail to add the deposit, your broker will automatically close the position while you incur the risks.
Is CFD trading Legal in South Africa?
CFD trading is legal in South Africa as the country's Financial Service Board (FSB) allows trading, allowing traders to trade CFDs. Traders can open CFD accounts with any broker of their choice as the regulatory body considers it legal in South Africa.
Nevertheless, FSB advocates the risk that comes with trading CFDs. While it might lead to more significant returns, there is also the likelihood of losing money when trading. Therefore, you should be willing to handle the risk that comes with CFD trading.
How to trade CFDs
To start trading CFDs, you should have fundamental knowledge about the market. Understanding how the market works is the first step to learning how to trade CFDs. We've already looked at how CFD trading works, meaning you have what you need to start trading.
To start trading, you need to create and fund a CFDs account with a reputable broker. PrimeFin offers a straightforward account opening process. It's a seamless process that gets completed within a few minutes. Furthermore, we offer several funding methods once you get verified.
The next step is to build your trading plan. Your trading plan involves several things, including the instrument to trade, risk-to-reward, and risk management. Firstly, you need to determine the instrument to trade. At PrimeFin, you have access to several tradable financial instruments, including stocks, cryptocurrencies, commodities, indices, and forex.
If you are unsure about the asset to trade as a CFD trader, you can check our educational center for more. Alternatively, you can look at earnings releases or the economic calendar to see moving assets. Remember, each CFD asset you choose is unique. It has its specifications, including available leverage, margin requirements, and spread.
Secondly, you need to choose your position. Interestingly, you can either go long or short. When you go long, it means you are buying the CFD. Alternatively, going short means selling the asset based on your analysis. To decide on when to go long or short, you need to understand technical and fundamental analysis.
Finally, after choosing the position, you need to decide your position size. The position size is the CFD unit value you want to trade. However, it depends on the asset you choose; all of these would be determined in your trading strategy and the account balance you have. With this, you can get your CFD trading started.
What are the benefits of trading CFDs?
CFD trading comes with several benefits. These benefits have contributed to its widespread acceptability, including hedging risk during short-term market dips, trading in falling markets, no borrowing costs or stamp duty, mirror trading, and exposure to an extensive collection of financial markets.
1. Wide range financial market
Trading CFD offers you access to several financial markets globally. It offers over 10,000 tradable financial instruments, including cryptocurrencies, commodities, indices, forex, metals, and shares. In addition, you can trade stocks of big companies, including Amazon and Apple.
2. Trade-in different directions of the market
One unique feature of trading CFD is the opportunity it offers traders to either go short or long. In most traditional financial markets, you can only take a particular direction, whereas, in CFD trading, you benefit from the rise or fall of price. It gives traders an additional opportunity to go long or short.
CFD trading offers traders a cost-efficient means of investing a small amount while taking positions larger than their capital. In other words, you can take trades that your money cannot open in a normal setting. However, the margin will depend on liquidity, instrument, and other factors.
4. Zero stamp duty
There is nothing like stamp duty on CFD trading because the underlying asset doesn't belong to you. Using leverage allows you to properly use your capital to get bigger exposure to the market through margin trading.
5. No fixed expiring date
While some derivatives, such as futures and options, come with an expiry date, the case is different with CFDs. CFD traders can hold their position – short or long to whenever they like. This also opens up opportunities for a huge return on investments.
6. Mirror Trading
CFD trading mirrors the trading environment. For instance, when you buy an Amazon share using CFD, it is equivalent to buying one of the Amazon shares traded on the NASDAQ.
7. Operational hedging tools
Most traders consider this as one of their CFD trading strategies since you can hedge your portfolio during high market volatility. Hedging is an effective strategy that allows CFD traders to hold their investment instead of selling when things don't go their way or have tax implications.
CFD trading strategies
Every trader must have their unique CFD trading strategy because trading CFDs comes with risks. There are several strategies that you can employ when trading CFDs. Here are a few we consider topmost for most traders.
1. Day Trading
It’s a CFD trading strategy that involves opening and closing trades on the same day. Here, you can hold the trade for a particular trading session and close it before the day's end. While it is practical for most new traders, it comes with several risks because of market volatility. Nevertheless, most traders prefer to use day trading to avoid holding trades due to the costs and risks overnight.
2. Swing Trading
Although it has the same concept as day trading, traders leave their position open for the short term. It is a flexible strategy for people who don't have time to look through their screens every hour. Traders hold their positions notwithstanding the overnight risks and costs.
3. Scalping Trading
This is one of the tasking CFD trading strategies that involves opening and closing your positions within seconds or minutes to take little short-term profit. CFD trader South Africa capitalize on prevailing momentum or trend to gather many small profits. Like with any trading strategy, it comes with a high risk of losing.
Recently, hedging has been a popular strategy that resonates with several traders as it helps minimize their losses. Hedging involves opening a position against another position. The main aim is to protect your capital and manage your risk. Hedging requires advanced trading experience. To effectively utilize this strategy, you need to have experience and adequate capital when trading.
5. News Trading
Also known as fundamental trading, it involves focusing on macroeconomic data. Traders using the news trading strategy look for big news announcements that will have a massive impact on the market. For instance, assuming Amazon in its quarterly report made a profit and wants to announce it, there is every possibility that its stock will increase. In this situation, news traders will look for opportunities to trade the news.
The breakout strategy is a popular strategy most new CFD traders use. Traders look for any breakout sign to enter a market. However, you don't have to enter whenever you see a breakout. You have to fine-tune it such that you only enter during a critical price level. Once the price gets to that position, you either buy or sell depending on the current trend.
To utilize this strategy to your advantage, you must understand the concept of trend. You can only enter the market when there is a clear price movement or trend. Nevertheless, it can be tiresome since you have to watch for potential opportunities.
It is like when you go fishing. You have to wait for the fish to take the bait. Once you notice a force pulling the hook, you can drag. Notwithstanding the strategy you decide to use for your CFD trading, patience is important.
Why Trade CFDs with PrimeFin?
PrimeFin is a technologically advanced trading platform that offers CFD traders an incredible trading platform. There are several features that can help boost traders' experience in trading. These are a few reasons why you should consider trading CFDs with PrimeFin.
- Advanced Artificial Intelligence technology - We provide the best-automated trading platform that offers you automated CFDs trading strategies, including copy trading and expert advisors.
- Widespread products – At PrimeFin, you can trade several financial instruments, including cryptocurrencies, indices, commodities, metals, shares, and forex. We offer over 10,000 tradable products on your mobile and desktop.
- Tight spreads – We offer the best low spread on several financial instruments starting from 0.0 pips.
- Customer service – PrimeFin prides itself in offering the best customer support system to traders. You can take advantage of our several communication channels, including, Email, phone, live chat, and social media platforms.
- Fast execution – You have access to fast execution of trades when trading with PrimeFin.
- Mobile Trading – With PrimeFin, you have access to trading anywhere anytime. You don't have to sit in a particular place as you can trade on the go using the mobile trading app. There is no limitation or restriction on trading with PrimeFin. Get started today!
The financial market is a complex market with risks and benefits. CFD trading allows traders to trade numerous financial instruments through margin trading. It’s not rocket science that the popularity of CFD trading is increasing.
With several benefits such as zero stamp fees, high leverage, lower margin requirements, a vast range of trading assets, you can appreciate its dominance over traditional markets. Despite these benefits, there are a few disadvantages that come with trading CFDs.
Frequently Asked Questions (FAQ)
Are CFDs legal in SA?
CFD trading is legal in South African. The Financial Services Board oversees the activities of CFD trading in South Africa.
What is CFD trading, and how does it work?
CFD trading allows traders to invest and trade assets through a contract between a broker and themselves. In this situation, these traders don't own the asset but speculate on price movement. Both parties agree to repeat market conditions while settling the difference between themselves.
A broker offers CFD to a trader who chooses the asset to trade. The asset can be forex, cryptocurrencies, stocks, indices, commodities, etc. The trader then opens a position – short or long with other parameters, including investment amount, leverage, etc.
Furthermore, depending on the position the trader chooses, either the broker or trader pays. For instance, if the trader goes short and the market goes in another direction, he must pay the broker. Alternatively, if the position closes the profit, the broker will pay the trader. That is a simple way of how does CFD trading works.
Where can I trade CFD in South Africa?
There are several places to trade CFD in South Africa. You need a reputable and regulated broker to trade. At PrimeFin, we are your number one trusted, regulated and reliable broker that offers several financial instruments and educational materials to improve your trading.
What is a CFD trading example?
In this example, we will assume you are going long. Assuming a trader thinks Google's share will appreciate and opens a position. He bought 50 CFDs on Google's share at $150 per share. Therefore, the total value of his purchase will be $7,500. If the share price increases to $190, he will be making a profit of $2,000.Open account