SHARES GO UP and shares go down, right? Yes, but in today’s market, the added complexity is that shares are going up and down in stronger bursts over shorter time periods.
According to South Africa’s volatility index, the JSE has become an increasingly unpredictable place to invest since August 2009 when volatility was at an all-time low. The JSE has nothing like the type of volatility of European or US markets, but we’re not exactly immune to the Euro debt crisis or US joblessness either.
Depending on how you like to invest, however, volatility can be your friend. “The volatility has been pretty good for our business,” says Shaun Caplin, marketing manager for IG Markets, a FTSE 250 company that provides the platform for trading in contracts-for-difference (CFDs).
CFDs are not exactly new; in fact, the world’s financial institutions have been using them for between 20 and 30 years. In South Africa, they were championed with much vigour by Global Trader which has branched out into other investment offerings.
They are derivatives; in other words, you are betting the share will go one way while the market will make money if it goes the other way. Caplin stresses, however, the IG Markets doesn’t take positions against its clients as has happened in other CFD offerings. It makes money from the fees.
Simon Brown of investment publication JustOneLap says there’s nothing to worry about with CFDs as long as you have trust in the ‘counterparty’, i.e. the organisation providing the platform. “You also need to know CFDs are leveraged products. If a share you’re hoping will rise in value falls quicker in value than even the general market was expecting, much quicker, you could lose your initial deposit.
Generally speaking, IG Markets offers CFDs over blue-chips. Given the regulatory requirement to provide profit or loss guidance, these companies don’t regularly serve up surprises. But it’s a risk.
Says Paul Stewart, CEO of Plexus Asset Management: “They are useful tools in the right hands. For the average man-in-the-street, be wary.”
It’s with the average investor in mind that Finweek sets out the differences in trading CFDs against shares and another product, the ETF. Shout if you have any questions. firstname.lastname@example.org