Nedbank rattles CFD cages

MONEYWEB, Author: Julius Cobbett, 06 February 2007

“Becomes the first investment bank to enter this booming market.”

The booming (and profitable) market for contracts for difference (CFD) will experience some competition with Nedbank Capital’s entry. Over the past few years CFDs have become very popular among South Africans because of the gearing and cost advantages they offer over conventional share trading. They are also deemed to be much easier to understand than other derivatives such as single-stock futures or warrants.

Currently, smaller companies such as Global Trader, Dealstream, Ideal CFDs and PSG dominate the CFD market. Nedbank’s entrance is bound to shake up the market, to the benefit of the consumer. The bank’s name is bound to be its major selling point. CFDs are an unregulated industry and many punters are unwilling to hand their money over to a company they are unfamiliar with. Nedbank’s pricing seems to confirm this, being roughly similar to its competitors. Brokerage is a maximum of 0,4% a trade (Global Trader is 0,5% and Dealstream is 0,3%).

Like other CFD brokers, Nedbank finances trades at an attractive interest rate. Here, it is priced the same as Global Trader, which lends money at the South African Futures Exchange Yield (Safey) plus 2%. Safey is currently 9,3%. CFDs offer speculators exposure to most liquid JSE-listed shares. It allows them to bet on both upward and downward movements in share prices.

Like single-stock futures, CFDs offer traders strong gearing because a deposit of about 10% is required to enter a trade. Thus a 1% movement in the underlying share price translates to 10% on your capital outlay. Nedbank’s trading platform is called NedTrade. It is a free system that can be downloaded once the trader has successfully completed an application and the bank has accepted the investor’s application.

Nedbank derivatives head Arthur Buchner says CFDs will appeal to savvy, risk-aware investors who are experienced in equity derivatives and are trading either directly online or via their stockbrokers. For more information on CFDs and other retail derivatives, listen to Moneyweb’s Trader’s Hour, every Thursday night between 7 and 8pm on Radio 2000.

Posted in Market commentary

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