Contracts for Difference (CFDs) Wealth & Investment
Stockbroking What are CFDs? A Contract for Difference (CFD) is an agreement between a buyer and a seller to exchange the difference in price of an underlying instrument over a period of time. CFDs provide clients with an opportunity to get geared exposure to the performance of a share in a simple and cost efficient format. CFDs allow investors to position themselves in relation to the rise or fall of JSE-listed securities, without the need for ownership of such securities. CFDs are leveraged products that require an investor to deposit 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 holder of the CFD. Effectively cash is being borrowed by the long holder and lent by the short holder in respect of the underlying security. The initial margin deposit will vary depending on the stock traded but will provide for gearing of between five and ten times. What are the benefits? Leverage/gearing Investors gain access to larger exposures of underlying securities by means of leverage/gearing. This means that investors outlay a relatively small amount of capital (in the form of a margin) to secure an exposure to the underlying security. Simple pricing methodology The price of the CFD mirrors the price of the underlying instrument. Interest and dividends are not priced in upfront, but are rather paid daily while the position is open, allowing the CFD always to track the underlying instrument s price. Long or short positions Investors are able to take a view on the market direction, and can trade that view through CFDs. Long and short positions are catered for when trading CFDs. Lower costs than trading in the underlying shares CFDs are a cost effective method of gaining geared exposure to a stock. No securities transfer tax is payable on the purchase of a CFD. There are also no clearing and settlement fees associated with buying or selling a CFD. No expiry A CFD is a perpetual contract, which means a position will not expire unless the position is closed out. This means that there is no need to roll a position (as can be the case with Single Stock Futures) and there is therefore a saving of rollover related costs. Dividends and corporate actions The cash equivalent of ordinary dividends and special dividends are paid to the long CFD holder. Non-cash corporate events, such as rights issues, simply adjust the position of the CFD to reflect the same economic effect as the underlying instrument on which the CFD is based. Please note that gearing may not be appropriate for your investment needs and circumstances. You should consult your financial adviser.
Why trade with Investec? Robust credit rating - As one of the big five banks Investec s credit rating is higher than many of the smaller players in the CFD market Competitive margin requirements - Investec Wealth & Investment offers you some of the most competitive margining in the market with gearing of up to 10 X on the top 40 stocks Trade CFDs directly through the Investec Wealth & Investment Online Trading Platform or through your personal stockbroker Access to Investec Wealth & Investment s research and idea generation processes Investec Wealth & Investment ranked #1 in the 2011 PWC banking review Who should use CFDs? CFDs can be used as a hedge by investors to reduce portfolio risk or by speculators to gain leveraged exposure to a security. Hedge risk Hedging with CFDs allows you to reduce market exposure while reducing the cost relative to selling the underlying holdings. It also allows one to lock in gains made on an underlying position without having to sell the physical shares. Speculating CFDs allow you to potentially profit from your views on the price direction of a share. The effect of gearing means that one amplifies the return on capital employed. The CFD holder is exposed to the full financial risks and rewards of owning the underlying share, while only having to put down a fraction of the full underlying exposure, in the form of margin. Interest, charges and margin requirements Execution premium An execution premium is charged on any trades done. This fee is charged at 0.45% on the exposure traded. Interest Interest is paid daily by holders of long CFD positions and received daily by holders of short CFD positions. Long positions will be charged at prime -1% and short positions will be paid at repo -0.75%. Scrip lending fees will also be payable on short positions. This fee will vary depending on the scarcity of the lend. CFD holders will also receive interest on the margin held at Investec. This is paid at repo -1%. Margin requirements Investec offers CFDs on the top 100 listed shares on the JSE, as well as certain ETFs and ETNs. The initial margin requirements will vary per stock according to various liquidity and volatility measures, but will allow for gearing of between five and ten times.
Stockbroking Pricing and cash flow example Let s look at a hypothetical long position on share ABC: You purchase long exposure to R100 000 worth of share ABC at the prevailing share price of R100 for 1 000 CFD contracts The margin requirement is 10% of the exposure On day one the share price closes at R103 On day two the share price closes at R99 On day three you sell the 1 000 contracts at the prevailing share price of R105 Day 1 Day 2 Day 3 Closing share price R103 R99 R105 Contracts traded +1 000 0-1 000 Contracts held 1 000 1 000 0 Initial margin (at 10%) R10 300 R9 900 0 Opening price R100 R103 R99 Closing price R103 R99 R105 Daily MTM [(opening price-closing price)*contracts held] +R3 000 - R4 000 + R6 000 Interest charge [(closing exposure*(prime -1%)/365] - R22.57 - R21.70 0 Execution premium [exposure traded* 0.45%] - R450 - R472.50 Total profit (total MTM interest execution premium) R4 033.23 Note: the above example is for illustrative purposes only. Risks As with any financial instrument, you should only trade in CFDs if you understand the mechanics of the product and the associated risks. You should carefully consider whether such investments are suitable for you in light of your circumstances and financial position. CFDs are not suitable for everyone and, if you are in any doubt, you should seek professional advice. Gearing The degree of gearing or leverage which is obtainable in trading these contracts stems from the payment of what is a comparatively modest deposit or margin when compared with the overall contract value. As a result, a relatively small market movement can, in addition to achieving substantial gains where the market moves in your favour, result in substantial losses which may exceed your original investment. CFDs are over-the-counter instruments CFDs are not regulated by the JSE at present. Each CFD trade entered into by you through our trading service results in you entering into a contract with Investec, as the issuer of the CFD. This means that you are taking on Investec credit risk when trading CFDs. Market risk Under certain market conditions, it may be difficult or impossible to close out a position. This may occur, for example, where trading is suspended or restricted at times of rapid price movement. If there is no liquidity in the share that you are wanting to trade, you may be unable to trade CFDs on that share. Disclaimer Although information has been obtained from sources believed to be reliable, Investec Securities Limited or its affiliates and/or subsidiaries (collectively ISL ) does not warrant its completeness or accuracy. Opinions and estimates represent ISL s view at the time of going to print and are subject to change without notice. Investments in general, and derivatives in particular, involve numerous risks including, among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell. The price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Returns and benefits are dependent on the performance of underlying assets and other variable market factors and are not guaranteed. Levels and basis for taxation may change. Exchange rate fluctuations may have an adverse effect on the value of certain investments. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees may hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not. ISL does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL. Investec Securities Limited Reg. No 1792/008905/06. A member of the Investec Group. A member of the JSE Limited South Africa. An authorised financial service provider. A registered credit provider Reg. No. NCRCP262
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