Contracts for difference, commonly known as CFDs are financial instruments that in essence, allow an investor to bet on the price fluctuations of assets on the market. If person A bets Person B that an Amazon share will increase in value and instead the share value drops, person A loses the bet and must, in terms of the contract, pay person B the difference between the Amazon share value when the contract was concluded and the share value when the contract was closed. CFDs are especially attractive because person A can make this bet on 50 Amazon shares without having to purchase the actual shares or spend the equivalent amount in any way. This is known as leverage. Instead of putting down the full value of the bet, person A pays a mere margin of it, a small percentage of the full value while still having the opportunity to win the full value. Of course, the Amazon price can drop resulting in a loss of the full value ( Person A having to pay the value of 50 Amazon shares X the difference in share price).
This is the risky business or the high-risk-high-reward business of CFDs that has become so popular amongst financial investors, and South African investors are no exception. Despite the 50/50 chance of winning, IG Markets expressly states on their website that 76% of investors guess price fluctuations wrong and lose the bets. A reasonable assumption for the everyday man on the street would be that the game is rigged. Instead, CFDs remain strangely popular among South African investors.
CFDs popularity in South Africa – Strange, but explainable. Their popularity is consistent with the South African gambling culture. Access to gambling opportunities has significantly increased in the past decade with the proliferation of smartphones even amongst low-income communities. Online opportunities to gamble through CFDs and other betting arrangements are now literally at the fingertips of the majority of South Africans, and South Africans have certainly seized these opportunities. The COVID – 19 Pandemic lead many down the path of the physical and virtual proverbial dice. Its knock-on effects of job losses and movement restrictions forced South Africans to get creative with ways to make money from the comfort of their homes. One would think that during a time when income is not guaranteed and the nation faces a recession, people would want to save and protect their money. A reasonable assumption, but these protectors are likely people who are simply not desperate enough to take the risks associated with gambling at that point. South Africa was a country of severe inequality and poverty even before the pandemic. Money-conscious South Africans are often those that have enough money of which to be conscious. The gambling culture in South Africa may be as prevalent as it is not only because gambling is exhilarating and potentially beneficial, but because for many, it is a final Hail Mary to escape dire financial positions. The leveraging opportunities of CFDs in particular would appeal to those “go big or go home” traders with nothing to lose and everything to gain.
The low margin requirements for CFD trading allow for significant inclusivity in financial markets. The accompanying opportunities for high returns are also enticing to those with little to nothing to lose, many South Africans falling into that category. CFDs are thus reasonably worth whatever risks with which they may come. After all, one can’t be concerned with losing what they don’t have.