ALUMA CAPITAL. Online Trading Specialists.

Transcription

1 ALUMA CAPITAL Online Trading Specialists

2 Introduction... 2 What is a CFD... 2 Benefits of CFD Trading... 3 CFD Trading by Example... 4 Understanding the Risks... 6 CFD Order Types... 8 CFD Markets Available... 9 Other Instruments Available

3 Contracts for Difference (CFDs) are fast becoming one of the most popular trading instruments in South Africa and the world. CFDs suit most trading strategies and can complement your existing trading plan. As you read through this guide, you ll see that CFDs may offer active traders significant benefits over other trading products. CFDs offer a way to gain leveraged exposure to various financial instruments. A contract for difference (CFD) is an agreement between two parties to exchange the difference between the opening and closing price of a particular financial instrument. While CFDs derive their price from an underlying instrument, the purchaser has no right to the underlying instrument. For example, if a trader holds Anglo CFDs, he has not voting rights at that companies AGM. CFDs are designed to give traders leveraged exposure to certain financial instruments. Different instruments have different margin rates depending on the underlying instruments liquidity and volatility. These margin rates refer to the % of the overall value that you need to have in your account in order to open and maintain a position. For example, if the margin rate on a CFD is 10%, you would need ZAR 10,000 to gain ZAR 100,000 exposure. CFDs also allow traders to take advantage of both rising and falling markets. Traders can Sell or go short a CFD which they don t already have in the anticipation of buying it back cheaper at a later date. 2

4 There are numerous benefits to trading CFDs including: Lower Trading Costs Easy Access to Leverage Long & Short Wide Range of Markets No Expiry Flexibility Lower Trading Costs: CFDs do not attract statutory costs that many other instruments do translating into lower trading costs. Leverage: Allows you to take advantage of gearing. Range of Markets: Manage your risk through diversification by having access to various markets. Flexibility: Hedge your portfolio with long or short positions CFD positions in indices, commodities, equities or FX. No Expiry Unlike futures contracts, CFDs do not expire, so you can avoid the cost and administration involved with rolling positions. Profit in Rising and Falling Markets Go long or short depending on your outlook. 3

5 To illustrate how a CFD works, let s go through a worked example. Let s say you opened a ZAR 25, account with Aluma Capital and are interested in trading a CFD of a fictitious company called XYZ. XYZ has recently launched an innovative new product that may turn the Company into a market leader and cause their share price to rise. Naturally, you hope to take advantage of this opportunity; however, you decide to do some research first. Making Your First CFD Trade You learn that XYZ shares are trading at ZAR per share. If you were to buy 500 shares from a stockbroker you would have to pay ZAR * 500 shares = ZAR 25, At the same time, you learn that an individual equity CFD based on 500 shares of XYZ has a margin requirement of 10%. This means that the outlay of the CFD is only ZAR 2, Choosing a Position Normally, when you trade shares, you can only speculate on one position: whether your stock will go up. With CFDs, you can choose: A buy position or to go long This means you enter the market in anticipation that the price of the individual equity (in this case, the XYZ stock) will rise. A sell position or to go short This means you enter the market in anticipation that the price of the individual equity will fall. Because you anticipate that the stock will rise, you decide to go long with a CFD in XYZ stock. However, if before your order is executed you 4

6 discover information that leads you to believe that the share price will drop, you can go short instead. Using Leverage Now let s say the price of XYZ jumps from ZAR to ZAR per share. If you had bought 500 shares from a stockbroker, you would have received ZAR per share, or ZAR 5, profit. You would realise the same ZAR 5, profit if you had bought 500 XYZ CFDs, however, your outlay would only have been ZAR 2, as opposed to the full ZAR 25, if you had bought the shares. The leverage on CFDs allows you to free up cash for other intentions or to trade other CFDs. Note that while profits are magnified due to leverage, so are losses. Trading with leverage has inherent risks which should be understood before entering the market. 5

7 Trading financial products requires a good understanding of the risks involved with the specific product you are trading. Even professional traders can lose money due to certain oversight and unforeseen risks. There are two key items which can help you avoid large losses, these are: Product risks related to most CFDs include Volatility and Leverage. Many factors (political, social, natural and technical) affect different instruments and markets in different ways. These factors all affect the volatility of that market which can bring trading opportunities but also higher risks. When a market is volatile, prices move quickly and erratically. For example, an earthquake in Japan can cause the JPY and JP225 index to become extremely volatile which can either turn traders away or attract them depending on their appetite for risk. Understanding what factors affect a market and knowing your risk appetite & strategy are key to avoiding losses in volatile markets. 6

8 Managing your margin and not gearing yourself too highly are also important risk management practices to avoid being stopped out of positions due to lack of margin and to allow for cyclical moves in instrument prices. If you are very highly geared, you do not allow yourself much breathing room. Other risks when trading CFDs include counterparty risk. As a CFD is an agreement between you and the financial services provider, you are taking inherent risk on the provider to stand good to their obligation to pay you the difference between the purchase and sales price. Aluma Capital executes on market hedge trades for every single CFD transaction on the platform which decreases this risk significantly. Aluma Capital is always 100% hedged on market and as a result has no market risk. If you make profit on a CFD, Aluma Capital makes the same profit on the underlying instrument and passes that profit on to you. If you make a loss on a CFD, Aluma Capital makes that same loss on the underlying instrument and settles that loss with the cash from your CFD loss. Leverage Risk Volatility Risk Counterparty Risk Minimise Risk 7

9 Stop Limit Market Limit Order An order to Buy or Sell an instrument at a specified price or better. For example, a limit order to Buy at a price of 100 will buy at a price of 100 or less. A limit order to Sell at a price of 100 will sell at a price of 100 or more. A take profit is a form of Limit order. Stop Order An order to Buy or Sell an instrument at a specified price or worse. These types of order can be used to catch a break out. For example, if you feel that a share rally once it trades above 100, you can set your stop order to Buy at 100 or worse, meaning you can catch the share on the way up, guaranteeing execution. A Stop Loss is a form of Stop order. Market Order A market order accepts the best available price on market. This guarantees execution but not price, any available price will be accepted. 8

10 One Account SA Equity CFDs Offshore Equity CFDs Commodities FX Offshore Indices From one Rand demoninated trading account on Aluma Capital you can trade the above mentioned CFDs as well as South African shares, SAFEX / Index futures (ALSI, ALMI etc) and offshore shares all from the same account. 9