Nedbank Capital Contracts for Difference (CFDs) are an exciting new trading product that allows investors exposure to JSE-listed securities on a leveraged basis.

A contract for difference (CFD) is an over-the-counter derivative contract under which two parties agree to exchange the difference between the opening and the closing value of the contract, with reference to an underlying equity instrument.

CFDs allow investors to position themselves in relation to the rise or fall of JSE-listed securities, without the need for ownership of the securities.

CFDs are a leveraged product that requires from an investor a deposit of cash as margin rather than the payment of the full value of the underlying position.

Depending on the position taken by such an investor, the investor may be either the long or the short counterparty to the CFD. Effectively cash is being borrowed by the long counterparty and lent by the short counterparty in respect of the underlying security.

How to Trade Nedbank CFD's

Nedbank Capital CFDs are traded via Nedbank Capital's trading platform known as NedTrade. This is a free system that can be downloaded once the investor has successfully completed an application form and Nedbank Capital has accepted the investor's application and emailed him/her a link to the page that allows for the downloading of the software.

NedTrade allows the investor to place CFD orders with Nedbank Capital, see real-time JSE prices and manage all trading affairs on the investor's margin account. CFD prices offered should be identical to the underlying JSE market prices.

Why trade Nedbank CFD's 

• Leverage/Gearing: Investors gain access to larger exposures to underlying securities by means of leverage/gearing. CFDs offer a potentially large exposure to the underlying security. Investors are able to outlay a relatively small amount of capital (in the form of a margin) to secure an exposure to the underlying security. This will have the effect of magnifying profits or losses and consequentially carries significant risk. The required margin per reference instrument is available from NedTrade, but the margin will range from 8% to 100%, depending on the underlying reference instrument.
• Trading any market direction: Investors are able to take a view on the market direction. Nedbank Capital CFDs allow both long and short positions, giving investors the ability to exploit both trading and hedging opportunities from increasing and decreasing security prices.
• Lower-cost than trading direct with the JSE: Cost-effective method of obtaining geared exposure to the equity market while trading via the internet.

Costs of CFD's

A charge on entry and exit of CFDs, with a maximum of 0,40% calculated on entry and exit values.

A charge is calculated daily on the exposure the long CFD provides to the investor in relation to the underlying reference instrument. The charge will be based on the SAFEY rate plus 2%. The exposure is calculated using the closing market price of the reference instrument. SAFEY is a floating rate.

A credit is earned daily on the exposure the short CFD provides to the investor in relation to the underlying reference instrument. The credit will be based on the SAFEY rate minus 3%. The exposure is calculated using the closing market price of the reference instrument.

Holders of long CFD positions receive the benefit of an amount equal to the cash dividends paid to holders of the underlying securities. Conversely, holders of short CFD positions must pay an amount equal to the value of any cash dividend paid to holders of the underlying securities.

Trading Strategies 

CFDs can be incorporated into a number of different trading strategies. Some of the more common strategies are:

• Long and short speculation: CFDs can be utilised as short-term trading instruments to speculate on future share price movements. The ability to open both long and short CFD positions means that CFDs can be used to speculate on both upward and downward price movements. The large amounts of leverage that can be accessed via CFDs enables investors to have greater exposure to the movement of the underlying securities than their available capital would otherwise allow. The use of leverage significantly increases the risk profile of an investment, and investors should make sure they read and understand the risks as set out in the CFD Terms and Conditions.
• Hedging: CFDs can be used to hedge an existing holding or exposure against adverse price movements. The effect of a decrease in the price of a share may be neutralised by taking a short position in a CFD over the same share. This strategy may be particularly useful if the holder of the share has a negative short-term view on the share's price but has a more positive longer-term view or otherwise would like to hold the shares. Investors should consult a tax consultant to assess the tax consequences arising as a result of trading in CFDs and using CFDs to hedge their portfolio.
• Pairs trading: Pairs trading involves speculating on the relative performance of two different securities. An example would be taking a long position in a CFD with respect to shares in one company and taking a short position in a CFD relating to shares in a different company, generally within the same sector. Pairs trading can provide a means by which investors can hedge some risk involved in taking a straight long or short position, and may mean that credit premium adjustments received on the short position can offset part of the debit premium adjustments due on the long position.