Equity trading is the buying and selling of stock or securities in listed public companies. The bearer of the stock is a part owner of the underlying company and as such is entitled to any proceeds should a dividend be declared, whilst undertaking investment risk i.e the risk of equities going up or down. The purpose of the stock exchange is to raise capital for the purpose of corporate expansion. As such the stock exchange is an important bell weather for the underlying economic health of a country.
Shares should be an essential part of anyone’s capital portfolio in view of realising financial freedom in their retirement. One generally cannot achieve financial independence on the proceeds on labour alone and retained earnings must be employed in the most efficient manner.
Equity returns have consistently been the best performing asset class for many years and drives to the heart of the notion of making your money work for you.
Contrary to popular belief, owning your house does not afford investment returns and on average make nominal returns.
Despite reoccurring business slumps, the stock market consistently provides a positive return in the inflationary environment we find ourselves.
What are Contracts for Difference CFDs
A CFD is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract.
CFDs are traded in a similar way to ordinary shares. The prices quoted by many CFD providers is the same as the underlying market price and you can trade in any quantity just as you would with an ordinary share. You will usually be charged a commission on the trade and the total value of the transaction is simply the number of CFDs bought or sold multiplied by the market price. However, there are some distinct differences from trading ordinary shares that have made them increasingly popular as an alternative instrument to speculate on the movements of shares or indices.
When you open a position, however, you do not have to pay for the full value of the shares. Instead you put up a deposit, from just 10% for the top South African shares. This means you can trade up to 10 times your initial capital.
When you close your position, the difference between your opening contract value and your closing contract value is realised. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose.
Advantages of Contracts For Difference (CFDs)
- Contracts For Difference (CFDs) are traded on margin so you can maximise your trading capital
- You can profit from falling or rising markets by trading long or short
- A single account can give you access to far greater range of financial markets.
- You can limit & manage your risk using Stop Losses and Limit Orders.
Risks of Contracts For Difference (CFDs)
- The geared nature of margin trading means that both profits and losses can be magnified and unless you place a stop loss you could incur very large losses if your position moves against you.
- It is less suited to the long term investor, if you hold a CFD open over a long period of time; the costs associated increase and it may be more beneficial to have bought the underlying asset.
- You have no rights as an investor, including no voting rights.
Traded on margin
Rather than pay the full value of a transaction you only need to pay a percentage when opening the position called the Initial Margin. The key point is that the margin allows leverage, so that you can access a larger amount of shares than you would be able to if buying or selling the shares themselves.
The margin on all open positions must be maintained at the required level over and above any marked to market profits or losses in order keep the position open. If a position moves against you and reduces your cash balance so that you are below the required margin level on a particular trade, you will be subject to a “Margin Call” and will have to pay additional money into your account to keep the position open or you may be forced to close your position.
Trade in rising or falling markets
CFDs allow you to trade LONG or SHORT. A Long Trade is where you BUY an asset with the expectation that it will rise, just as you would when buying a normal share. A Short Trade is where you SELL an asset that you do not own in the expectation that the price will fall and you can buy the asset back at a cheaper price. Shorting in the ordinary share market is almost impossible. With CFDs, however, you can go short as easily as you go long. Giving you the ability to profit even if a share price falls if you trade the right way.
No Stamp Duty
Because with CFDs, you don’t actually physically buy the underlying shares, you don’t have to pay stamp duty - a saving of 0.5% when compared to a traditional share deal.
Commission is charged on CFDs just like on an ordinary share trade. The commission is calculated on the total position value not the margin paid.
Because CFDs are traded on margin if you hold a position open overnight it will be subject to a finance charge. Long CFD positions are charged interest if they are held overnight, Short CFD positions will be paid interest.
The rate of interest charged or paid will vary between different brokers and is usually set at a % above or below the current LIBOR (London Inter Bank Offered Rate).
The interest on position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price. Each day's interest calculation will be different unless there is no change at all in the share price.
Trade Shares and Indices
CFDs allow you to take a view on shares and indices and some CFD providers also allow trading on currencies and sectors.
Stop and Limit Order
Because of the geared nature of trading on margin it essential to have access to facilities that let you open or close positions if certain levels are reached.
You can also use a CFD to protect your long-term holdings against variable market conditions. It may be cheaper to open a short CFD position in the shares rather than sell the physical shares in order to buy them back later.
•BPBernstein is a registered FSP in terms of CFD's and Offshore Investments. License number 40810.
BP Bernstein Offshore Investments
In recent years, South Africans have experienced a weakening Rand against all major currencies. This, coupled with the volatility in our currency, has led to a growing number of investors seeking investment opportunities abroad in order to diversify their investment risk, and effectively "hedge" their portfolios against the declining Rand.
Now, with our international representation through BNP Paribas, our clients will be able to choose from a wide and diverse range of investments products, many of which are not available here in South Africa. Investors will benefit from our exposure to global markets and expertise.
Our on-the-spot statement reporting will assist in making the most beneficial choices for your offshore portfolio.
Who can invest offshore?
Every natural person, who is 18 years or older, a South African citizen and who is a registered taxpayer, is entitled to invest R2 million offshore through their Offshore Investment Allowance.
With our Rand-denominated offshore investment options, our clients can invest abroad using Rands. There is no need for you to apply to the South African Reserve Bank for exchange control approval.
BP Bernstein will use its asset swap capacity to buy foreign investment products, on behalf of our clients, through our offshore 'partner'.
The benefits of investing offshore
Diversify your risk:
- Spread your risks over more than one market. South Africa is considered a high risk, emerging market.
- Access steady investments in developed countries.Invest in structured products not available in South Africa.
Increased investment opportunities:
- Invest in structured products and hedge funds that are currently not available in South Africa.
- Foreign currency fixed-period bank deposits, foreign government and corporate bonds
- Foreign venture capital and many other options.
- With investments in foreign currencies that offset any decline in the values of the Rand (and therefore the value of your local investments).
- Higher potential earnings, and higher potential capital gains. Overseas investments are likely to improve the risk/return ratio in any portfolio.
BP Bernstein as your Asset Manager
Choosing us as your local investment manager carries the significant advantage that we will be more easily accessible should you need to communicate.
Clients will be able to visit our local office and get an up-to-date report of their offshore investments
Through constant communication between ourselves and our offshore 'partner', we will offer you expertise in all the world's major financial centres.
BP Bernstein can act exclusively as a "one-stop" investment house for our clients, representing both their local and offshore investments, whilst continuing to offer our clients the personal touch that we have built our reputation on, over the last 60 years.
•BPBernstein is a registered FSP in terms of CFD's and Offshore Investments. License number 40810.
Exchange Traded Notes (ETNs)
ETN's typically provide access to assets that are less suitable to physically hold and store, such as commodities, currencies, etc. The issuer of the ETN is allowed to cover its liability to deliver performance through exposure to futures or forward contracts and does not have to hold such assets in physical form. The issuer of the ETN has the obligation to provide the total return (performance) of the asset being tracked. This obligation requires that the investor needs to take into account the creditworthiness (credit rating) of the issuer of the ETN. This is not necessary with an ETF.
Exchange Traded Funds (ETFs)
ETF's typically track a basket (or index) of shares. The shares that replicate the index are physically held in a Trust (under the control of an independent Trustee) and ETF investor purchases a participatory investment in this portfolio (fund), which trades as an ETF on the JSE. ETFs are typically registered as Collective Investment Schemes (the same as unit trusts) and are regulated by the Financial Services Board (FSB). ETFs trade all day through the secondary market. This makes ETFs far more liquid and transparent than other non-listed investment instruments. Unlike other listed equities, the purchase of ETFs through the JSE does not incur Securities Transfer Tax (STT) of 0,25% for investors.
The Satrix is a portfolio of locally structured ETF's there is a range of Satrix ETF's that can be bought threw Bpbernstein Pty (Ltd) like:
Satrix 40 ETF: Satrix 40 endeavours to replicate the performance of the FTSE/JSE Top 40 index. This index constitutes the forty largest companies, by market capitalisation, listed on the JSE.
Satrix FINI ETF: The Satrix FINI endeavours to replicate the performance of the FTSE/JSE Financial 15 index. This index comprises the 15 largest financial shares listed on the JSE.
Satrix INDI ETF: Satrix INDI endeavours to replicate the performance of the FTSE/JSE Industrial 25 index. This index comprises the top 25 industrial companies listed on the JSE.
Satrix RESI ETF: The Satrix RESI endeavours to replicate the performance of the FTSE/JSE Resources 10 index. This index consists solely of resources based stocks, including mining companies, mining holding companies, mining finance and exploration companies and resource based stocks.
Satrix SWIX ETF: The Satrix SWIX Top 40 endeavours to replicate the performance of the FTSE/JSE SWIX Top 40 index. This shareholder weighted Top 40 index makes use of the share register of the top forty companies to reduce the constituent weights for foreign shareholders in these stocks. In addition, the SWIX Top 40 is adjusted for cross-holdings and strategic holdings. The impact is to reduce the weightings of mainly resource and dual-listed stocks in the Top 40 index by approximately half.
Satrix DIVI ETF: The Satrix Dividend provides a means of investing in a portfolio of companies paying higher than average dividends on the JSE. The Satrix DIVI portfolio invests in the FTSE/JSE Dividend Plus Index. This consists of 30 companies, selected from the JSE Top 40 and Mid-Cap indices, that are expected to pay the best normal dividends over the forthcoming year. The unique features the Satrix DIVIoffers are:
Satrix RAFI ETF: The Satrix Rafi index weights the underlying constituents using four fundamental factors, rather than pure market capitalisation. These four factors are dividends, cash flow, sales and book value. Secondly, Satrix RAFI 40 will track the total return version of the FTSE/JSE RAFI 40 index, measuring the total return of the underlying index by combining the capital performance plus the reinvestment of income of the constituent companies in the index. All dividends received from underlying constituents will be reinvested into the portfolio net of dividends withholding tax.