Let’s say you have a bit of spare cash and want to invest it into something that could potentially give you a good return on your money. You don’t want to go out and buy shares in companies without knowing what you’re doing, so how about buying virtual shares instead?
In the financial world, ‘virtual’ is usually used as a negative term—after all, everything should have some physical form—but with virtual trading being so popular in Japan at the moment, perhaps we need a rethink.
What is CFD trading?
CFD stands for ‘Contracts for Difference.’ In simple terms, it means that instead of buying or selling genuine products or currencies, you buy or sell contracts based on their performance.
The price difference between buying one contract and selling one contract will be precisely the same as the amount of money you’ve made or lost on your investment – minus any broker’s commission, of course.
Then once your contract expires, you’re either allowed to sell it on at the new market price or hold on to it and watch its worth rise or fall.
Therefore, a CFD is an agreement between a buyer and a seller where the buyer pays a premium to the seller for the chance to benefit from either a rise or fall in the price of the underlying asset.
The CFD is considered a derivative because its value is derived from another investment, such as shares, indices, or commodities.
In Japan, only those registered as professional traders are allowed to trade with CFDs. To obtain this registration, applicants must take training courses and pass exams administered by financial institutions called “securities companies”.
What is CFD trading for virtual shares?
CFD trading with Plus500 is slightly different from traditional CFD trading because you don’t actually own any of the assets but instead speculate on whether their value will rise or fall over a certain period.
With regular CFDs, you’d typically be buying actual commodities such as stocks and shares, gold, silver or oil—anything that can provide a return—and then selling them straight away if they go up in value (or buy more) thus making a profit.
The advantage of trading on margin means that traders can speculate on both rising and falling markets. They also do not require large initial deposits to speculate on significant price movements.
Another advantage is that traders can open positions with a single mouse click, compared to face-to-face trading. A trade initiator would have to meet the counterparty and negotiate prices physically.
Aside from professional traders, only those pre-approved by securities companies are allowed to speculate through CFDs. This approval process considers factors such as credit history, net worth and employment status.
In general, these individuals tend to be experienced investors who already own shares of risky assets such as equities or commodities.
In addition, there are limits on how much an individual is allowed to invest using CFDs.The maximum amount that a trader may invest in a single company’s shares is 1 million yen, and for an index or currency pair, the limit is below 1 billion yen.
Another major disadvantage of CFD trading in Japan is that while currency dealers quoted prices in both directions, cash settlement takes place only in yen.
As such, traders need to be prepared to pay brokerage fees when exercising options (i.e. converting contracts to cash) or supplying margin funds to make up for any shortfall between market value and contract price during expiration months.
The commission fee charged varies from one broker to another, but it usually ranges from 0.1% to 0.4%.
The leading disadvantage with CFD trading is that, unlike a regular investment in a company or real currency, there’s no actual value behind the asset you’re speculating on. It’s all down to opinion and the way people feel about specific companies/commodities/currencies at any given time.
So if enough people pull out their investments for whatever reason, then your virtual shares could become worthless very quickly.
Visit Saxo to view website and learn more.