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Four things you need to know about CFDs

by , 24 June 2015

If you want to trade shares and indices, one option you have is to use contracts for difference (CFDs).

To trade CFDs, it's important you understand the basic principles that apply to this trading instrument.

Read on to find out what these are and how they apply to trading CFDs…

CFD factor #1: The value of CFDs

As CFDs are derivative instruments, this means they derive their value from an underlying asset. In the case of CFDs, they derive their value from the shares or indices you want to trade.

For example, if you wanted to trade Sasol shares using CFDs, the value of a Sasol CFD would reflect the price of the underlying Sasol share.

CFD factor #2: CFDs aren’t standardised

CFDs aren’t standardised products. This means they don’t trade through a regulated exchange like the JSE. Instead you trade them through a stock broker or trading company providing CFD trading.

On the other hand, single stock futures are standardised. They trade through the JSE’s derivatives market.

CFD factor #3: CFDs don’t have expiry dates

With many derivatives products, such as single stock futures, they have expiry dates. In the case of single stock futures, they expire every futures quarter.

CFDs are perpetual contracts. Your trade remains open until you close it.

This doesn’t mean you should keep a CFD trade open for the long-term though. The costs of holdings onto CFDs mounts up over time.

CFD factor #4: CFDs have daily financing charges

When you trade CFDs, each time you hold a position open overnight there are daily financing charges involved. If you opened and closed a CFD position in one day, you wouldn’t have to pay this charge.

If you enter a long CFD position, you pay a daily financing charge. If you enter a short CFD position, you receive a daily financing charge.

So there you have it. Four things you need to know about CFDs.

Four things you need to know about CFDs
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