Take a moment to consider the sheer number of investment opportunities that are now available to traders throughout South Africa. While stocks and shares may immediately come to mind, these are only the proverbial tip of the fiscal iceberg. Contracts for difference (CFDs) are yet another vehicle that has proven to be extremely popular. Assuming that you are unfamiliar with this approach, a primer is never a bad idea. Let’s take a look at the fundamental principles associated with contracts for difference, and some surprising benefits that these positions offer.
What is a Contract for Difference?
A CFD is an extremely unique type of investment, as traders will never physically own the underlying asset. Investors will instead enter into an agreement (contract) with an online broker. The main intention is to capitalize on the difference between the opening and closing prices within a predetermined period of time (hence the term “difference”).
Another reason why CFD trading South Africa has begun to enjoy so much attention involves the size of the position in question. As the asset is never owned outright, it is possible to employ leveraged trading. This is a means by which investors can own a relatively large portion of an asset without needing to commit a significant percentage of their funds.
Once the contractual period expires, the trader will realise any profits and/or losses. The time frame associated with a contract for difference can vary. While these can theoretically be held indefinitely, most investors seek positions lasting for days, weeks, or even months. The liquid nature of short-term CFDs also makes them ideal options for day trading enthusiasts.
Why Include CFDs Within Your Portfolio?
We can now see that the basics of a CFD trade are rather straightforward. Still, there are several reasons why South African traders are keen to take advantage of the potential opportunities. Let’s examine some motivating factors.
Bullish or Bearish
Most of us automatically associate profits with an asset that gains value over a specific period of time. While this indeed applies to CFDs, note that it is also possible to increase your capital if prices happen to be falling (known as a short trade). The main intention here is to accurately predict how the value of an asset will change in the future. In other words, profits can be accrued in both rising and falling market conditions.
A Common Investment Vehicle
Contracts for difference should never be considered “fringe” investment opportunities. On the contrary, platforms such as MetaTrader 4 offer these as a portion of their standard service packages. This is the same reason why the vast majority of MetaTrader 4 brokers South Africa offer a wide range of CFDs. These can also be paired with other types of assets including blue-chip stocks, commodities such as precious metals, currency pairs, and bonds. The main goal here is to develop a well-rounded portfolio capable of superseding unpredictable market conditions.
Leveraged Trades
The concept of leveraging was briefly highlighted earlier. This type of position allows traders to enter into a position for (at times) as little as 1% of its total value. The advantage here is that leverages can result in exponential profit margins. Although this is an undeniable benefit, it also represents a double-edged sword. Note that prices failing to move according to plan can also lead to substantial losses. Any type of leveraged trade should only be considered after you have already gained a substantial amount of experience with contracts for difference.
Access to a Truly Global Marketplace
CFDs are some of the most diverse trading instruments currently available. This makes them ideal for those who want to diversify their holdings. Consider some of the asset classes that CFDs can accommodate:
- Treasuries
- Commodities
- Indices
- Stocks
- Fiat and cryptocurrencies
This is yet another reason why it is crucial to work in tandem with an online brokerage that offers access to a host of CFD packages.
Only the Beginning
Note that this was only a cursory overview of why CFDs should be included within your existing approach to trading. The professionals at Exness will be more than happy to provide additional information, and to address any other concerns that you may have. Knowledge is power, and contracts for difference could be just what your portfolio requires to continue gaining forward momentum.