Index and share CFDs

An index CFD tracks a basket of companies as one number. The index provider chooses the companies and sets a rule for how much each one counts. A share CFD tracks one company only. Its price moves when that company's shares move. Neither product gives you ownership of shares. You hold a contract whose value changes with the underlying number. That is the difference from buying shares through a stockbroker, where your name goes on a register.

A currency pair such as USD/ZAR is different again. It has no company behind it and no basket. It compares two currencies, and at 18.4100 one US dollar buys 18.4100 rand. An index CFD and a share CFD both sit on top of a market that has opening and closing times. USD/ZAR trades nearly around the clock from Monday morning to Friday evening. So a currency position can usually be closed when you want, while an index or share position cannot.

The rand value of one point depends on the contract. For a local index CFD quoted in rand, one point might be worth R1.00 on 0.10 lots. For a US30 CFD quoted in dollars, the point value is in dollars and must be converted at the current USD/ZAR rate. At 18.4100, one dollar is R18.41. So 0.10 lots of a dollar-quoted contract gives a point value of 0.10 times 18.41, which is R1.841. The same number of points then produces a different rand amount on each contract.

An index CFD follows the hours of its underlying exchange. A US index trades during New York hours, which fall in the South African evening and night. A local index trades during Johannesburg hours. A share CFD follows the hours of the exchange where that company lists, and some shares trade for a shorter session than the index they belong to. When the exchange is closed, the CFD market is usually closed too. You cannot open or close a position during those hours.

This matters because price can move between the close and the next open. News released while the market is shut can shift the opening price. If you wanted to close at a certain level and the market is closed, you wait. The position stays open, and the risk stays with it. A currency pair does not usually leave you in that position, because its market runs almost continuously through the week. That is a practical difference, not a small one.

Overnight financing is charged on positions held past a certain time. The charge depends on the broker and the contract, and it varies. Some brokers also widen spreads near the open and close, when trading is thin. Check the contract specifications for the exact session times and the financing terms. If you cannot watch the market during its open hours, that is a reason to use smaller size, not a reason to ignore the hours.

A share CFD can be adjusted when the company pays a dividend. If you hold a long position, the broker may credit an amount linked to the dividend. If you hold a short position, the broker may debit it. The exact treatment is set out in the contract specifications and varies between brokers. An index CFD can also be adjusted, because the companies in the basket pay dividends and the index level reflects that. A currency pair has no dividend and no such adjustment.

Corporate events change the underlying itself. A share split multiplies the number of shares and divides the price. A merger or a takeover can remove a company from an index. When that happens, the index provider changes the basket, and the CFD contract follows. Your position may be adjusted in cash, or the contract may be closed and replaced. The rules are in the contract specifications, and they differ by broker and by product.

These adjustments arrive without you placing a trade. That is why the common mistake is to treat an index CFD or a share CFD like a currency pair. A currency pair does not pay dividends and does not split. An index or share CFD can change in ways you did not choose. Before opening a position, read the section on dividends and corporate events, and work out what a cash adjustment would do to your balance.