What are all these ads on Facebook for share trading?
As a young male in the final stretch of his 20’s, it seems I am apparently the perfect candidate for targeted marketing on Facebook relating to ‘share trading’. These have peaked my curiosity lately as to how these work and whether the information being handed out is any good.
So let me give you the quick rundown on what I have seen.
First of all, the majority of these trading platforms are not trading shares at all. They are trading derivatives. So what is a derivative? A derivative is a special type of contract that derives its value from the performance of an underlying entity (Wikipedia). An example of a derivative is as follows:
“You may think Microsoft shares are going to go up. So what you do is you enter into a contract where you agree to buy 1000 shares at the current trading price but to be purchased in one month. To compensate the seller for the month delay you agree to pay the seller a fee.
After one month, the shares may have gone up, so you are able to buy the shares from the seller for the cheaper price, sell them and then make a profit (minus the fee to the seller).
The same also works in reverse. If the shares go down, you still have to buy them at the agreed price and if you sell them, you will make the loss on the shares PLUS the fee to the seller.”
So what is derivate trading? It is gambling, pure and simple. There are however legitimate reasons for derivate trading. For example, they can be used as a risk management tool. I will use another example:
“A superannuation fund purchases 1,000,000 shares in BHP hoping they will go up. This is quite a large purchase for the super fund and may be outside their acceptable level of risk.
To offset this, they may enter into a contract with the option to sell the shares at today’s price (plus the fee to the seller) but in 6 months.
If the shares go up, the super fund would not exercise their right to sell the shares and will enjoy the windfall (minus the fee they have paid to the seller). If the shares go down, they can sell them at the price agreed upon and have offset their large financial risk.”
So should you trade derivatives? If you want to take a punt, feel free to go ahead. I do have to warn you though, for every winner, there is a loser. Like gambling, you should never put more money into this type of trading then you are willing to lose. Derivatives however may actually be a good option for your investment portfolio, but leave it to the professionals when it comes to these investments.
Also, let’s remember the real winner here is the trading software which makes a commission or fee every time anyone trades.
This type of trading is gambling, similar to betting on a horse because you have heard it looks strong and should not be confused with real investing. All I can say is that if you come to Bounce Financial we wouldn’t recommend that you structure your investments using this sort of trading. Instead, your investments would be structured to responsibly grow over time in line with your goals.
What about you, have you ever tried to use any of this ‘trading software’?
This post is from Ben Brett. Check out our details in the About Us page.