Why CFD trading is sweeping the world

Low initial investment, the ability to go long or short, and leverage trading positions are three reasons.
Image: Nathan Laine/Bloomberg

Covid has been a boon for online trading worldwide. Online retail traders now account for 20% of all US stock orders, according to Bloomberg Intelligence research, as stay-at-home workers look for ways to supplement their incomes.

The pandemic, meme stocks, cryptocurrencies and geopolitical tensions have all played a part in more people wanting to learn and participate in trading financial markets, says Shaun Murison, senior market analyst at IG Markets SA.

“A lot of new clients signed up because potential investment and trading opportunities to support incomes have become more visible.”

IG allows traders to sign up in minutes and practise different trading strategies using a demo account before committing real money. Clients can trade a type of derivative known as contracts for difference (CFDs), which give the purchaser the benefit of the underlying price movement in a financial asset, rather than physical ownership. For example, buying a CFD on Apple allows you to benefit (or suffer) from any price movement in the underlying stock, without you ever owning the stock.

We asked Murison to explain CFDs in more detail.

What is CFD trading?

You’re buying the price movement in an underlying asset, whether that is forex, shares, indices or commodities. You don’t own the underlying asset. You just get the benefit of the price movement in that asset.

It’s called a CFD because you are agreeing to exchange the difference in the price of an asset from the point at which the contract is opened to when it is closed.

What are some of the benefits of CFD trading?

Low initial investment is the first benefit. You can open an account and start trading with just a few thousand rands. We recommend that people practise their trading strategies using fictitious money on a demo account first, before putting real money at risk.

The second major benefit is the ability to go long or short. In other words, if you think Apple is going to fall, you can short it and profit from that move. Or if you think it will rise in price, you can go long. You can do the same with thousands of other instruments, such as stocks, forex pairs, indices and commodities.

A third benefit is the ability to leverage your position. This means you can purchase a large exposure with a small amount of capital – otherwise known as trading on margin. This is a double-edged sword – it’s great when the market moves in your direction because your profits are amplified, but losses are also amplified when the market moves against you. At IG Markets, our maximum leverage is 30:1, meaning R1 or $1 will buy you R30 or $30 of market exposure.

When trading CFDs, there are two types of margins. A deposit margin is required to open a position, while a maintenance margin may be required if your trade gets close to incurring losses that the deposit margin – and any additional funds in your account – will not cover. If this happens, you may get a margin call from your provider asking you to top up the funds in your account. If you don’t add sufficient funds, the position may be closed, and any losses incurred will be realised.

Another benefit of CFDs is you can hedge a stock portfolio – for example, you may believe the stock market is due for a correction but do not want to sell because of the costs and tax liabilities that may be incurred, so you can short those stocks or a reasonable facsimile thereof, such as an index, to limit yourself against any downside losses.

How many instruments can you trade?

We have more than 17 000 instruments, including shares, indices, commodities, forex, options and more. And you don’t have to access multiple platforms to trade different markets. Everything is available under one login, wherever you need it – you can trade via your web browser, your phone or your tablet.

Is this like spread betting?

There are some important differences. Unlike spread betting, CFDs are designed to mimic trading in their underlying market fairly closely. Buying an Apple share CFD, for instance, is the equivalent of buying a single share in Apple – if you want to buy the equivalent of 2 000 Apple shares, you’d buy 2 000 Apple share CFDs.

Buying or selling a forex CFD, meanwhile, is equivalent to buying a certain amount of base currency by selling the equivalent amount of quote currency. So, buying a single CFD on GBP/USD would give you the same exposure as buying £100 000 in US dollars.

If you’re already experienced in non-leveraged markets, CFDs can be more immediately familiar than other forms of leveraged trading.

What are the costs of trading?

At IG we charge an opening and closing commission on CFD shares as well as an overnight funding fee, and traders also pay the ‘spread’ costs. The spread is the difference in price paid by buyers and sellers of a financial instrument and is how brokers make money. The spread tends to be very small, but varies according to market liquidity. In other words, the more people trading an instrument, the lower the likely cost. It’s certainly considerably cheaper than a direct purchase of shares.

Do you offer education?

Yes, there is a vast amount of training material on our website, as well as regular webinars where we explain trading from the viewpoint of both the beginner and more the experienced trader.

Where do people find out more?

Go to our website.

Register for the upcoming IG Markets SA webinar ‘Placing the trade: a how-to guide’, which takes place on Thursday, April 7, at 11h00. 

About IG Markets South Africa

IG Markets South Africa was established in 2010, and is regulated by the Financial Sector Conduct Authority operating with a FAIS licence, FSP No 41393 and is an over-the-counter derivative provider. It has an office in Sandton to service South African clients, and its board and senior management in South Africa consists largely of South Africans. It is one of the biggest employers in the online brokering category in South Africa.

IG Markets is part of the London Stock Exchange-listed IG Group, which has a market cap of £3.4 billion (around R71.4 billion). It has more than 313 000 active clients worldwide.

Brought to you by IG Markets SA.

Note that CFD losses can exceed your deposits.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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