CFD Trading Overview

CFD Trading Overview

Contracts for difference (CFDs) are one of the world’s fastest-growing trading instruments. With CFD over shares, for instance, while the ideal scenario is companies growing their businesses, managing their debt levels and meeting their profit forecasts there are also such risks as companies reporting skeletons in their closet that they haven?t previously disclosed.

The JSE should get off its’ backside and offer CFDs as a product – the Australian Stock Exchange (ASX) is now offering CFDs – a move which brings a lot more regulation of the product, moves the product from being OTC to exchange traded, and which ultimately protects clients a lot more than OTC.

Assume that the Client has opened a CFD position with a notional value of 100.000 USD (initial margin used for this position is 1000 USD) if the underlying market moves by 2.1% against the Client this will result in a reduction to the Client’s equity by 2100 USD and as a consequence the position will be closed automatically resulting in the Client losing the deposited amount.

Suppose the shares of XYZ Ltd, are quoted at an offer price of $2.00 and Mr A intends to buy 2,000 shares of XYZ Ltd as a CFD at the offer price of $2.00. Assuming the CFD provider sets the margin of the CFD at 10%, the initial margin Mr A puts up will be 10% x $2.00 x 2000 = $400.

In the above Example 3, if Mr A intends to keep the position open, the $100 loss will be deducted from the initial margin and he will be required to top up his margin with additional funds (known as a margin call) to the initial amount of $400, or to a level prescribed by the CFD provider