With this tool you can trade almost any market
This is a flexible derivative tool where you can trade a large range of markets.
Just think, with this, you can trade shares, commodities, indices, currencies and more...
You’ll basically be trading on the price derived from the underlying market value, this means you won’t own anything physical.
By not holding the actual instruments, makes your trading a lot more cost effective.
So let’s not waste any more time and let me introduce you to this revolutionary instrument!
Welcome to the world of CFDs...
A CFD is short for Contract for Difference, which is simply an agreement.
Essentially, you’ll make an agreement between the price of the contract for when it’s opened and the price of the contract for when it’s closed.
Whatever happens in-between the contract, could determine a hefty profit for you.
There are many reasons why CFD trading can make your life easier compared to other derivatives, but I’d like to highlight my top five.
Five reasons why you should choose CFDs over shares
Reason #1: CFDs are leveraged instruments so you can make magnified returns!
By trading CFDs you’ll have the full benefit of trading any instruments you desire, and only paying a fraction of the price.
So let’s say on average the gearing for a CFD is 10 times, and you’re dealing with the underlying share price movement.
This means that for every one share you buy, you’re exposed to the value of the ten shares.
Let’s use an example, so I can explain it better...
If you buy 10 Sasol shares worth at R450 per share and at a gearing of 10 times, you’d only have to pay R4,500 (R450 X 10).
So essentially, you’re buying 100 CFDs on Sasol.
You’ll have an exposure of R45,000 (R450 per share X100).
The margin requirement is 10%, you need to put down.
So, you’ll only have to put in an initial deposit of R4,500 (R45,000/10).
So you’ll pay a fraction of the price and be exposed to 100 Sasol shares even though you paid for 10 Sasol shares value (R4,500/ R450) per share.
What a bargain!
Reason #2 The costs are much cheaper when dealing with CFDs compared to shares
You don’t actually own anything physical when you deal with CFDs which is a good thing. It basically means you don’t have to deal with annoying costs, like you do with actual shares.
Forget paying unnecessary costs like, stamp duty, STRATE, STT and the full value of the shares, of course. Not to mention, the brokerage is a lot cheaper trading CFDs compare to buying shares.
But here’s a tip for finding the cheapest rates. Anything more than 0.50% costs per trade and your broker is ripping you off.
It’s very easy to find a broker who will charge less than 0.50%.
Reason #3 Market goes up and market goes down and you can still profit!
Traditional investors generally buy into the market and hold for long periods of time, regardless of which direction it’s moving in.
As you know, the CFD is an agreement between the opening and closing price of the contracts so here’s what you can do.
Either you can take advantage of the market going up and buying (going long) at a low price and selling at a high price, locking you a nice profit.
Or you can anticipate that the market is going to go down and so you can sell (go short) at a high price and re-buy at a lower price which can bank you a hefty gain.
Reason #4 You don’t have to worry about your contracts closing you out
Unlike Single Stock Futures and other derivatives, CFDs don’t have an expiry date.
So you don’t have to worry about your contracts automatically closing you out.
But bear in mind, you’re still trading based on the underlying share, so watch out for a cautionary on suspension or worse, a delisting.
Reason #5 you might not own the share but you will get paid the dividend!
If you want to receive the benefits of getting paid dividend then you need to know two tips to receive them.
First thing you must do, is make sure the underlying shares that you hold, pay dividends.
And second, which is crucial, know that you can only receive dividends if you buy (go long) the CFD on the underlying shares which issues them.
If you sell (go short) a CFD that have the underlying share which pays dividends, then you’ll have to pay the portion.
So there you have it, five reasons why I only trade the CFD instrument compare to any other derivatives when dealing with shares.
Always keep in mind
“Wisdom Yields Wealth”