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Shares, ETFs, Forex, CFDs: What should you be trading?
Nicole Cameron
5 November 2012

Shares, ETFs, Forex, CFDs: What should you be trading?   

Today’s traders have access to a growing number of trading instruments, from tried-and-tested shares through to Forex, CFDs and ETFs. Each offer different degrees of volatility, and have unique pros and cons, allowing for traders across the spectrum of risk tolerance and trading style. If you’re new to trading and investing, learn which instrument could suit your needs and personality as we discuss the four most common below.

ETFs to match the market

Exchange Traded Funds or ETFs can be thought of as a kind of mutual fund that is traded on a stock exchange, like normal shares. They’re passively managed investment funds which track an index or benchmark with the goal of duplicating its performance. An example would be the SATRIX40, an ETF representing the top 40 companies listed on the JSE. This gives them the benefit of transparency, high liquidity and usually fewer surprises than if you traded individual shares. ETFs are a simple way to diversify a portfolio and spread risk, and also offer low-expense ratios compared with traditional mutual funds. Of course, the market can turn resulting in losses, but you can set stops and limits with ETFs as you can when trading shares. The best way to manage risks with this trading option is to be well educated on the ETF you have selected, and to have spent some time following it. Out of all the instruments listed here, ETFs are perhaps the simplest and offer the least risk. You can trade local and international ETFs easily via the SharenetCFDs platform.

The solid share

Trading shares requires more involvement and research than investing in an ETF. Shares, particularly if one looks at blue chips (shares from well-established and financially sound companies) are generally considered to be less volatile than forex or CFDs, and can withstand difficult economic conditions while still paying out dividends. Investors less comfortable with risky investments and who prefer to hold shares for the longer term will go for blue chip shares. Trading sessions for shares on the JSE also take place during regular business hours, so if you’re more of a eight-to-five kind of trader who likes to take the weekend and market holidays off, then investing in shares might be the best option for you. Of course, even if you have more of an appetite for risky investments, it’s wise to balance your portfolio with some blue chips that will guarantee steady growth. To this end, beginner and advanced investors alike can benefit from a subscription to PowerStocks, a research house which analyses the markets for you, allowing you to simply trade on the findings.

Fast forex

The currency market, with an estimated US$3.5 trillion traded daily, is larger than the shares and futures market combined and is booming in popularity worldwide. It essentially involves buying and selling a combination of two currencies, called a cross or currency pair. One is bought (called “going long”) and the other is sold (called “going short”) in order to profit from the value increase of one currency relative to another. Perhaps the biggest attraction to this market is the ease of entry it offers, with significantly lower barriers to entry than traditional markets, such as no minimum initial investment. For South Africans, however, it must be noted that the Reserve Bank does not allow for forex trading with a Rand-based account. You would have to open a foreign bank account, which requires a tax clearance certificate. Sharenet can help you set up a forex trading account through SharenetCFDs.

Your trading hours are around the clock – at any time of the day or night you can find an active pair to trade, allowing those in full-time jobs to benefit from out-of-office time. While traders have to pay the bid/ask spread to enter the market (which can be a significant cost), this is usually the only mark-up, with no other commissions involved. The forex market, however, is not for the faint-hearted, and has been termed the “wild west of finance”, with very little regulation or central marketplace. While a reputable retail dealer can probably shield you from things like stop running, moving prices just to cause losses and other crazy activities, forex traders need to have an appetite for risk and a tolerance for stress.

To help you know when to buy and sell, Sharenet suggests that you invest in a technical analysis software package such as CycleTrends or MarketTracker, which uses historical price cycles to predict future price movements. These programmes can be used for shares as well as forex trading.

CFDs making the difference

Contracts For Difference or CFD trading has become very popular in the last decade and is fast replacing traditional share trading, as it is a flexible instrument that allows you to leverage your returns. While buying shares from a traditional stockbroker means paying the full purchase price, using a CFD can create the same exposure with less cash, as you can trade most markets from a 1% to 10% margin.
For example, if you wanted to buy 500 ABSA shares at R136 each, you’d normally have to lay out R68 000. If you sold them for R138 you would gain R1000, a 1.47% increase. With a CFD, you could buy 500 contracts of the share for a 10% margin, or just R6800. In this instance if you sold them for R138 you would still profit R1000, but with a 14.71% return. It’s also clear that with CFDs there is scope for significant capital loss had the market moved against your position, so this trading instrument is best suited to those who are willing (and able) to deal with these extremes. For more information on trading CFDs and setting up a CFD trading account, visit www.sharenetcfds.co.za.

Conclusion

Now that you’re armed with more knowledge about some of the common trading instruments, you can start experimenting to get a feel for which suit you best. And don’t hesitate to include a selection of trading instruments – a diversified portfolio is far more prudent than putting all your eggs in one basket.

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