Q: What is a Contract for Difference (CFD)?
A: A CFD is a contract between two parties, which settles at the close of the contract, with the profit on the trade determined by the difference between the opening (at the start of the contract) and closing price of an instrument, specified in the contract, multiplied by the number of shares in the contract.
One of the parties is the stockbroker, which in the case of the PSG Wealth trading and investment platform is PSG Securities Ltd (a member of the JSE, and authorised financial service provider). The other party is the being you, the trader Contracts can be 'long', which presumes the underlying share price will increase in value, or 'short', which presumes that the underlying share will decrease in value.
Q: Who owns the underlying share?
A: The ownership of the underlying shares remains with the broker, but you and the broker do not hold the rights associated with those shares (such as voting rights). However, the trader does receive the full benefits of owning those shares such as capital growth and dividend income (dividend income is only earned on long positions). On a short position the opposite is true with regards to dividends in that you pay out when the share receives a dividend.
Q: Are CFDs listed instruments?
A: No, they are a derivative of the listed instrument.
Q: Is the CFD industry regulated?
A: CFDs should only be provided by an authorised financial services provider. All FSPs are regulated by the Financial Services Board. However, the CFD industry in South Africa is not regulated through an exchange.
Q: What is the most I could lose?
A: Losses may be unlimited although you are trading a geared product, leveraged at 15% on Top40 shares and 17.5% on the next 60 (mid-cap) shares, for every R1 that the market moves against you, you will lose R6 per share. In such an instance you will have to “top up" the variation margin in order to maintain your open position. Should this negative movement continue, you will have to keep topping up.
The reverse is true in that profits could be unlimited as long as the market move in the favour of the direction specified in your contract.
Q: When to CFDs expire?
A: CFDs do not have expiry dates.
Q: What is a Script lending fee?
A: A script lending fee is charged when a trader shorts a CFD contract as the broker need to borrow the script (or shares) on the traders behalf.
Q: What are the costs?
A: Our standard CFD brokerage commission rate is 0.4% (excl VAT). We are always open to negotiate brokerage rates for clients who trade the market actively. Interest on the total value of the open position is charged at SAFEX +2%. That is normally equal to around Prime -2%. Script lending fees for short positions are 1.5% per year, charged per day on which the position is open, with a minimum of R250 per position. Please note each new position opened needs to have a minimum cost value of R25,000 - which requires a R3,750 (15%) initial margin deposit from the investor on a Top 40 stock and R4,375 (17.5%) initial margin deposit for Top 41 - 100 stocks. Interest on cash balances in the account will be paid at the JSE Trustees rate.
The margin required for opening a position is determined by the PSG Wealth trading and investment platform as a standard percentage of the value of the total position. Margin rates vary between 15% and 20%. The latest margin rates are available per share after you have logged in to our trading site.