Sharenet releases controversial security

Alistair Anderson, courtesy of Business Day newspaper

Contributing Writer

Online market information and service provider, Sharenet has established a Contract For Difference (CFD) offering, it announced on Friday.

Some investors have been reluctant to buy CFDs worldwide in the past because of the number of risks associated with them and the ease with which people can lose their money invested in them due to those risks. They have been banned in the US because of these dangers.

However, Sharenet believed its CFD service was a good option for potential investors.

"We can proudly say that SharenetCFDs is the premier choice. Not only is it built onSharenet’s ethos and foundations of transparency, customer service and IT excellence, but (it) also capitalises on international expertise, partnering with IG Markets in the UK," Sharenet said.

A CFD is an agreement between a buyer and a seller stipulating that the seller will pay the buyer the difference between the current value of a stock and its value when the contract is made.

If the difference turns out to be negative, the buyer pays the seller. The purpose of a CFD is to allow investors to speculate on the movement of the price of the underlying stock without having to own the shares.

The company Strate is a Central Securities Depository which provides clearing, settlement and depository services for securities that facilitate the management of risk and the realisation of value for investors in SA.

People have chosen CFDs over stock options because of how simple their pricing system has been and because of their range of underlying instruments. For example, option pricing incorporates the time premium that decays as it nears expiration.

CFDs only reflect the price of the underlying security. Because they do not have an expiration date, there is no premium to decay.

The main risk of the financial instrument is that the other party in the contract would unable to meet the obligation.

Investors use a margin system to trade CFDs. This means that if the value of the portfolio falls below the minimum level, an investor is subject to a margin call.

When a person buys on margin, they take out a partial loan from a broker to cover a larger investment, a CFD, for example, than they could normally afford to cover. A margin call then occurs when the amount of actual capital the investor has falls below a set percentage of the total investment or CFD.

Profit and loss on CFD trades take place when an investor executes a closing trade.

Because CFDs can employ a high degree of leverage, investors can lose money quickly should the price of the underlying security move in the undesired direction.

Sharenet said its CFD service would not involve a securities tax or Strate fees.

CFDs have also been criticised in the past for the volatile nature.

Sasha Naryshkine of Vestact Management said his feelings against leverage-based investments were not changed by CFDs.

“I’m not a fan of CFDs. Professionals have got them horribly wrong before and now we are expecting ordinary people to manage them too. The problem is that there value is very volatile,” he said.