Education
Any investment you make carries its own risks and rewards.
Before you get started, it is important to understand your intentions for investing and your appetite for risk.
Once you are clear on your goals, you can research the various vehicles for growing your money.
This simple educational guide gives you the basics of the various products we offer.
01 Equity
When you buy a share, you buy a part of a company. The more the company grows, the larger your share becomes. If you own one or more shares, you become a shareholder and can receive dividends when the company has made sufficient profits. Shares are also referred to as equity or stock.
Companies issue shares as a way to earn the money to grow their business. Unlike raising money through a loan, shares ensure that the company doesn’t need to pay back the capital amount or make interest payments.
Anyone can purchase shares on the exchange and any amount can be invested. However, this can only be done through a stockbroker such as ourselves. We are licensed members of the stock exchange who trade securities on behalf of our clients. We are also able to provide insight on stock exchange investment issues. The fees charged on share transactions include brokerage charges, VAT on brokerage charges, securities transfer tax and settlement fees. Transaction costs also include an Investor Protection Levy (IPL).
Investing is a reliable way of providing for retirement or unexpected expenses.
When buying different companies shares you are diversifying (getting a variety) your collection of shares and also limiting your risk of losing your money.
Shares have shown the highest returns in the long term, outstripping other assets such as bank deposits and property. Investing in shares increases the chances of beating inflation.
For example, to make a profit, the return on investment should be greater than 6%. Research indicates that the return on shares on the JSE has in most cases exceeded this percentage for the last hundred years.
When managed correctly, shares can make good, sustainable profits. However, any investment is always open to the unpredictability of local and international markets. That is why it is critical to understand your appetite for risk from the outset and define your goals. Educate yourself on the stock market, research the companies you want to invest in and speak to us. Knowledge is power.
We offer our clients the opportunity to have their share portfolios managed by one of our experienced portfolio managers. The minimum amount to invest is R200 000.
02 Single Stock Futures
An SSF is a contract between two investors. The buyer pays a pre-determined margin for 100 shares of a single stock for delivery against full payment at a future date, while the seller promises to deliver the stock at the same price and on the same date. Each legally binding SSF contract is standardised with regard to size, expiration, and tick movement.
SSFs offer you an opportunity to enhance the performance of your equity portfolio, protect your investments against adverse price movements and affordably diversify risk.
Whether you are a sophisticated retail investor, professional trader or short- term equity trader, SSFs have appeal. Typically, SSFs appeal to the risk averse, also known as hedgers or speculators. This is because SSFs reduce risk by protecting an existing share portfolio against possible adverse price movements in the physical market, preserving its performance. Speculators use SSFs in the hope of making a profit on short-term movements in the futures price. Speculators may have no interest in the underlying other than taking a view on the future direction of its price. It should be noted that in certain cases investors could lose more than their initial margin paid. The risk of investing in SSFs is high, some of which are similar to investing in CFDs.
03 Contract For Difference
Contracts for difference (CFD’s) are issued directly to you by SA Derivatives (Pty) Ltd and are not regulated or guaranteed by both the JSE Limited or by the Financial Services Board.
As SA Derivatives (Pty) Ltd, we act as the counterparty to your transaction. In other words, your trade and related responsibilities and any claims that you may have are between you and SA Derivatives (Pty) Ltd.
A CFD is a contract between two parties, typically described as “buyer” and “seller.” This contract states that the seller will pay the buyer the difference between the current value of an asset and its value at contract time. If the difference is negative, then the buyer pays to the seller instead.
Essentially CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
The issuer of a CFD requires a cash security deposit (margin) from the holder as a deposit of good faith to cover market movements as well as interest, commissions and dividend settlements.
The CFD is started by making an opening trade (buying or selling) on a particular instrument. This creates a ‘position’ in that instrument. There is no expiry date. Once the position is closed, the difference between the opening trade and the closing trade is paid as profit or loss.
Even though the CFD does not expire, any positions that are left open overnight will be ‘rolled over’. This typically means that any profit and loss is realised and credited or debited to the client account and any financing charges are calculated. The position then carries forward to the next day.
The holder of a long CFD will gain from positive market movement in the underlying asset and will receive dividends declared by the underlying equity. Conversely, a short CFD will lose from a positive market movement and pay dividends declared by the underlying equity.
The holder of a long CFD will pay interest to the issuer calculated on the nominal value of the underlying asset for the opportunity to hold the leveraged exposure. Conversely, a short CFD will receive interest from the issuer for the opportunity to be short the leveraged exposure.
Long CFDs receive dividends in their cash account on the official ex-div date and the funds will be available for withdrawal two business days after the dividend payout date of the underlying equity, while short CFDs pay them.
In short, yes. CFDs carry substantial risks. On the flip side, this means that CFDs can bring big rewards if everything goes right. It is important to educate yourself and carefully consider whether such investments are suitable for you in light of your circumstances and financial resources.
It is important to be aware of the following:
- If the market moves against your position, you may, in a relatively short time, sustain more than a total loss of the funds placed by way of security deposit. You may be required to deposit a substantial additional sum, at short notice, to maintain your minimum security deposit balance. If you do not maintain your margin balances your position may be closed out at a loss and you will be liable for any resulting deficit.
- Under certain market conditions it may be difficult or impossible to close out a position. This may occur, for example, where trading is suspended or restricted at times of rapid price movement.
- Where permitted, placing a stop-loss order will not necessarily limit your losses to the intended amounts, for market conditions may make it impossible to execute such orders at the stipulated price.
- A spread or straddle position may be as risky as a simple long or short position and can be more complex.
- Markets in Contracts for Difference can be highly volatile and investment in them, carry a substantial risk of loss. The high degree of “gearing” or “leverage” which is obtainable in trading these contracts stems from the payment of what is a comparatively modest security deposit when compared with the overall nominal value. As a result a relatively small market movement can, in addition to achieving substantial gains where the market moves in your favour, result in substantial losses which may exceed your original investment where there is an equally small movement against you.
This brief statement cannot disclose all risks of investment in Contracts for Difference. They are not suitable for many members of the public and you should carefully study such investments before you commit funds to them. They may also have tax consequences and you should consult your lawyer, accountant or other tax advisor in this regard.
04 Yield X
The Yield-X system allows for order driven interest rate and currency product trading, in a user-friendly environment. It also creates a full and comprehensive ‘cradle to grave’ (initial order to final settlement) audit trail in a fully regulated environment. Regulation falls within the ambit of the JSE acting as a Self Regulating Organisation within the Financial Markets Control Act, co- regulated by the Financial Servicves Board. Yield X has worked closely with the South African Reserve Bank (SARB), National Treasury (NT) and two market makers, for the dispensation of this product.
The JSE believes that South Africa deserves a world-class interest rate and currency market, Yield-X provides ease of access, ease of use and cost effectiveness in an environment that encourages a high level of transparency and integrity. Yield-X brings a greater range of products to the market and allows for the participation of new entrants. This generates increased liquidity and market efficiency. Altogether, broader, cheaper capital markets will translate into benefits for all stakeholders and the South African economy at large.
05 Agriculture & Commodities
Agricultural Derivatives provide a platform for price discovery and efficient price risk management for the grains market in South and Southern Africa. They play an active role in price determination and transparency in the local agricultural market.
Producers and users of agricultural commodities hedge their price risk, thereby limiting their exposure to adverse price movements. This encourages increased productivity in the agricultural sector as farmers and users are able to concentrate their efforts on managing production risks. As always, there are risks. In Agricultural Derivatives, these variables are the weather, farm/production management and seasonal conditions.
The futures market exists solely for the purpose of allowing commercial users to hedge their transactions to lock in favourable prices. Yet, the market could not operate efficiently and effectively without speculators, as they provide the necessary market liquidity. Speculators use futures and options in an attempt to make profits on short-term price movements.
The agricultural derivatives market has developed to such an extent that the cash market now largely relies on its price transparency and discovery process to function properly. Prices generated on the derivatives market are now considered the industry standard and reference point throughout Southern Africa.
There are several reasons why trading Agricultural Derivatives on an exchange protects you as the investor.
- Regulation – Safex APD is a division of the JSE managed by the JSE and regulated by the Financial Services Board (FSB) which oversees the exchange’s reporting with regards to the Security Services Act of 2004 (SSA) which replaced the Financial Markets Control Act of 1989 and the Stock Exchange Control Act of 1985
- Margins – When trading derivative products, the exchange requires the payment of both initial margins and variation margins. The initial margins are determined by the clearing house and vary depending on historical price volatility. The variation margin is a daily flow of funds (profits/losses) resulting from any open position calculated through a methodology of Mark-to-Market (M-t-M)
- Financial Integrity – When dealing with the exchange the exchange’s clearing house becomes seller to every buyer and buyer to every seller. As a member, you are free to deal with each other without any credit risk. This eliminates counter party risk.
- Transparency – Pricing is determined purely on the basis of demand and supply. Prices for each contract are negotiated between buyers and sellers via an electronic order matching platform called Nutron. The presence of numerous buyers and sellers ensures that prices are always competitive and adjust efficiently to reflect changes in the underlying market.
Registered agricultural derivative brokers place orders into the JSE from remote locations during trading hours (09h00 – 12h00). These are automatically matched on the basis of time and price priority. The exchange guarantees performance by counterparties in a futures contract.
Agricultural derivative prices are quoted at their Rand value per ton, delivered on truck alongside silo basis Randfontein. One futures contract comprises 100 tons for white and yellow maize and 50 tons for wheat and sunflower seeds. Soybean contracts are quoted at their Rand value per ton, and comprise 25 tons per contract. The soybean contract trades at the same basis price in a number of registered silos with no location differentials.
Daily price limits, limiting the daily movement of prices, add security to the market. If the limit is reached on two like contracts on two consecutive days the price limits are increased to 150% of the original limit and the extended limits will remain in place until the daily movement on all like contracts is less then the original limits. Extended price limits also result in increased initial margin requirements for those periods when the extended limits apply.
All products traded on the Agricultural Derivatives market can be physically delivered at expiry in fulfillment of a futures contract. This does not mean that 100 tons of maize is delivered by truck to the exchange to complete the delivery process. The exchange makes use of a silo receipt, a transferable but not negotiable document, representing a specific quantity of stock in a registered Safex silo to effect delivery. Paper and electronic silo receipts issued by registered silo owners is accepted by the exchange. The silo owner storing the product guarantees the quality of stock as per detailed grading methodology specified by the National Department of Agriculture and to outload the specific product upon presentation of the silo receipt. Delivery can take place any business day on a particular delivery month. (A futures position in the July contract can only be delivered on during July). Physical delivery takes place over a two-business day period, the notice day followed by the delivery day (the next business day). Delivery can take place at any Safex approved silo and each delivery point is subject to a location differential (based on transport costs). Location differentials are determined by the exchange and are available on the Safex website.
The JSE’s SAFEX Commodity Derivatives Market provides you easy access to both physically settled grain products as well as a number of international commodities that are traded and cash settled in ZAR.
- CBOT Soy complex Futures & Options (includes beans, meal and oil)
- Grain Futures & Options
- Options on Commodity Futures
- Chicago Soft Red Wheat Futures & Options
- Chicago Corn Futures & Options
- Crude Oil Futures & Options
- Copper Futures
- Gold Futures & Options
- Platinum Futures & Options
- SAVI White Maize
- Silver Futures
06 How to Compare Costs
Choosing a stockbroker to work with is an important decision. While many will assess their future broker on the basis of cost, it is important
Here are some important things to keep in mind:
- Are your equity holdings and excess cash protected in case of a broker default?
- Are you aware that some service providers do not pay interest on your margins and cash balance?
- Are you aware of Price Shading?
- Are you sure there are no further hidden costs?
- Are you going to be subjected to and forced to talk to a computer?
- Are you able to speak to a qualified and experienced trader who understands you & the market?
We at SA Stockbrokers pride ourselves in tailoring our products and fees according to your individual trading style and needs.