Regarding online trading, security is always a paramount concern. CFDs, or Contract for Difference, are derivative instruments that allow traders to speculate on the price movement of underlying assets. These assets can be anything from stocks and commodities to currencies and indices. In Japan, CFD trading is considered a grey area because CFDs are not officially recognized as financial instruments by the Japanese Financial Services Authority (FSA), meaning there is no legal framework regulating CFD trading in Japan.
However, this does not mean that CFD trading is illegal in Japan. Several offshore brokers offer CFD trading services to Japanese residents. The FSA does not regulate these brokers, but they are usually regulated by reputable financial bodies such as the CySEC or FCA.
Risks of CFD trading in Japan
Lack of regulation
As mentioned earlier, the FSA does not regulate CFD trading in Japan, meaning there is no legal protection for Japanese traders who trade with offshore brokers. If these brokers were to collapse, Japanese traders would have no recourse.
Leverage risks
CFDs are traded on leverage, meaning you can control a prominent position with relatively small capital. While this can lead to increased profits, it also increases the risk of losses. If the market moves against your position, you must top up your margin account or close out your position to avoid being liquidated.
Market volatility
The prices of CFDs can be highly volatile, meaning that prices can move rapidly and unexpectedly, leading to significant losses if you are not careful.
Counterparty risk
When you trade CFDs, you enter into a broker’s contract, meaning that the broker is the counterparty to your trade. If the broker goes bankrupt, you may not be able to recover your losses.
Slippage
Slippage occurs when the price of an asset moves against you before your trade is executed. It can occur during periods of high market volatility or when there is a significant difference between the bid and ask price. Slippage can consume your profits or increase your losses.
Gapping
Gapping occurs when the market price of an asset moves sharply up or down, and there is no trading activity in between. It can happen during periods of high volatility or when there is news that affects the price of an asset. Gapping can lead to losses if your stop-loss order is not executed at the desired price.
Market manipulation
Some brokers may use market manipulation to benefit themselves at the expense of their clients. It can take the form of artificially inflating or deflating prices, executing trades at unfavorable prices, or refusing to execute trades. If you suspect that your broker is engaging in market manipulation, you should report it to the relevant authorities.
Fraudulent brokers
Many fraudulent brokers operate offshore. These brokers may offer attractive bonuses or promises of high returns, but they will ultimately steal your money. It is important to only trade with reputable and regulated brokers to avoid becoming a victim of fraud.
Why trade with CFDs in Japan?
Access to global markets
CFD trading allows you to trade a wide range of underlying assets from all over the world, meaning you can take advantage of opportunities in different markets and diversify your portfolio.
Short selling
CFD trading allows you to short-sell assets, meaning you can profit from falling and rising prices.
No stamp duty
When you trade CFDs, you do not have to pay stamp duty. It is a tax that is levied on the purchase of certain assets, such as shares.
Trading costs
The trading costs of CFDs are generally lower than those of other financial instruments. It includes commissions, spreads, and financing charges.
Tax benefits
CFD trading may offer some tax benefits in Japan. For example, profits from CFD trading may be exempt from capital gains tax. However, you should seek professional advice to ensure you know all the relevant tax implications before trading.
Flexibility
CFD trading is flexible. You can trade online from anywhere in the world, and you can choose when to trade.
If you want to start trading CFDs, you can do so through Saxo Bank.
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