Today, trading shares is a relatively common way to invest in South Africa. As a result, there are numerous methods of investing in the stock market available to South African traders that do not entail purchasing actual shares.
In this article, we examine two such instances—CFDs and fractional shares—and consider the advantages of each investing tool for traders in South Africa.
CFD shares vs Fractional shares in South Africa Revealed (2022):
A contract for differences (CFD) is a financial derivative in which the difference between a trade’s initial and closing prices is settled in cash. You cannot count on getting a specific stock or product when using CFDs.
Contracts for Differences are a handy instrument for trade enthusiasts in South Africa.
CFDs can be used to trade in the price movement of securities and derivatives. Derivatives are basically financial investments that have an underlying asset as their source. Therefore, CFDs are used by traders and investors in South Africa to make wagers on the price inclination of the underlying asset or security.
Contracts for Difference (CFD) traders have the option of betting on an increase or decrease in price. Similar to stocks, CFDs are traded with buyers expecting an increase in price and sellers expecting a decline in price.
A buyer of a CFD may decide to sell if the value of the underlying asset increases after they buy it, and in order to do so, they must determine the difference between the buy and sell prices. The investor’s finalized gain or loss from trading is recorded in the brokerage account.
One opens a sell position when they believe that a security’s value will decline. To close the position, they must purchase an offset transaction. The gain or loss is once more netted and paid out in cash through their account.
How to trade CFDs in South Africa
Contracts for Differences (CFDs) can be used for trading a wide range of assets and securities, including ETFs (ETFs). South African traders will also make advantage of commodity futures contracts, such as those for corn and crude oil, to make predictions about price changes.
Futures contracts are standardized agreements that obligate parties to buy or sell a specific asset at a specific price on a specific date in the future.
Contrary to popular assumption, CFDs allow investors to trade the price fluctuations of futures rather than being actual futures contracts. CFDs (contracts for difference) are traded similarly to conventional securities, with buy and sell prices and no fixed expiration dates.
The OTC market for contracts for difference (CFDs) is run by a group of brokers in South Africa who work together to determine prices by balancing supply and demand. To put it another way, prominent exchanges like the Johannesburg Stock Exchange do not allow the trading of contracts for difference (CFDs).
As such, with a contract for difference (CFD), the difference between a trade’s beginning and closing prices is traded between a client and broker.
Understanding Fractional Shares
A fractional share is an equity stake that isn’t worth a full share. These shares may be the outcome of a stock split, a DRIP, or any other commercial activity.
Although having fractional shares would be advantageous for investors, doing so is usually not practicable due to the stock market’s limited liquidity.
Fractional shares can be created by a variety of processes, including stock splits, mergers, and acquisitions.
Participants in dividend reinvestment programs (DRIP) in South Africa may end up with a mixture of entire and fractional shares. South African shareholders may reinvest their dividend payments into further shares of the same firm or fund through dividend reinvestment arrangements.
Due to the money’s cyclical nature of reinvesting in the purchase of further stock, this is not limited to complete shares. Reinvesting capital gain distributions or taking part in a dollar-cost-averaging scheme can also result in the acquisition of a fractional share.
The number of shares left over following a stock split may occasionally be divisible by 2. Following a 3-for-2 stock split, shareholders who own an odd number of shares would only end up with a fraction of a share because they would receive three shares for every pair of shares they already have.
Mergers and acquisitions
Since new common stock is frequently combined by a fixed ratio, a corporation may issue a fractional share in the event of a merger or acquisition. Due to the ratio, shareholders might only receive a small portion of a share.
Certain brokerages may purposefully split whole shares in order to sell consumers smaller quantities of stock. This kind of share split typically happens with big stocks like Tesla or Google.
How to trade fractional shares in South Africa
Fractional shares can only be joined with other fractional shares to create a whole share for sale through a significant brokerage in South Africa. If there is limited market demand for the stock being sold, it could take longer than planned to sell the fractional shares.
Some investors in South Africa who mistakenly acquired fractional shares as a result of things like stock splits might not be interested in keeping them.
If the stock in question is in high demand, they might be able to locate a brokerage firm willing to accept the fractional share. Additionally, they might try to locate a South African brokerage company that would be willing to sell another half share.
Advantages of trading CFDs in South Africa
With the help of contracts for difference (CFDs), South African investors can follow the price fluctuations of the market for the underlying security without actually buying the security or taking delivery of the underlying asset.
CFD trading on margin is made possible by the capability of borrowing money from one’s broker in order to enhance one’s leverage or the size of one’s position in order to magnify gains. Brokers in South Africa will require traders to maintain a minimum balance in their accounts before accepting this type of trade.
The leverage provided by CFDs is typically higher than the leverage provided by more traditional trading techniques.
In contrast to conventional exchanges, the CFD market often has fewer limitations. As a result, you might require less money to create a brokerage account for CFDs.
The typical minimum amount needed to start an account with a South African broker is $100. Cash dividends given out on CFDs, which are securities that mirror actual firm actions, can also help a trader’s return on investment.
Most CFD brokers offer their products in each big market. Traders can use their broker’s interface to access all markets that are open.
Finally, opening a long or short position, as well as a buy and sell position, may be done quickly and easily by a trader in South Africa utilizing CFDs. In most circumstances, short sales are allowed in the CFD market. An instrument can be shorted at any time.
Since the underlying asset is not actually owned, there are no borrowing or shorting fees. Additionally, trading a CFD often results in little to no costs.
The spread is the amount that the broker makes from each trade by separating the ask and the bid prices. Brokers are paid a commission based on the discrepancy between the prices they quote for the ask and the bid.
Advantages of trading fractional shares in South Africa
“Fractional share investing” refers to the capability of making a single investment in a portion of a share. This is a good choice if share prices are too high for a prospective investor. This makes precise financial investments by shareholders in a firm easier.
Making an investment in a company with a high stock price doesn’t need you to hold off until you have enough money to buy an entire share of the stock. There is no need for a significant number of money to get started.
If the market does not allow fractional share investing, you can only buy a stock or ETF in amounts equal to the share price. You don’t have to purchase whole shares; you can purchase fractional shares and invest exactly the amount you want to.
Finally, it can be difficult to buy solely in whole share increments from a range of South African companies for precise asset allocation. Fractional shares make it possible to invest in numerous businesses with a single dollar.
The method of trading that does not require complete ownership of the asset you are trading includes both fractional shares and CFDs. With fractional shares, you just hold a portion of the share value, however, with CFD trading you are betting on the asset’s underlying price.
For traders in South Africa, CFDs and fractional shares each have specific benefits. CFDs are, however, frequently simpler to trade, access, and resell on the markets.
Because of this, the majority of traders in South Africa would be best served by beginning with CFD share trading and then looking into fractional shares when their portfolios allow them to invest in share values that they would not be able to sell as quickly.
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