Some Background information
So the purpose of this CFD vs Binary options is post is to outline the similarities and differences between them. Traders usually do a large amount of research before deciding on beginning binary options trading or any other form of trading. With so many choices of trading instruments and trading platforms on offer throughout the world and South Africa, Traders are spoilt for choice. So whether you are a total newbie or professional trader. Binary options or any other form of trading background. Its always best to understand the differences and similarities between each form and type of trading there is. Once you understand that, you can then make an educated decision on which would be the best choice for you.
Globally the financial trading market has been showing a peaking interest in alternative methods to trade such as binary options. This increase could be because of the ease of access to retail traders these days due to the internet and technology. Further to that traders that are mastering binary options are seeking further similar trading forms or methods to make profits on another front at the same time. Thus we have written this CFD vs binary options to help educate you.
Now to some, CFD trading (contract of difference) might seem to fit the bill to to use in conjunction with binary options. Yes its true there are some similarities. However there are some definite differences between these two forms of trading. So traders must consider these before choosing to invest in CFD with a hope that it would go brilliantly with binary options. Within this CFD vs binary options trading post we wish to highlight exactly that.
So What Are CFD’s ?
Well, Contracts for difference (CFD) trading is actually a contract between a buyer(you the trader) and a seller(the broker). So the broker basically sells the difference made between the opening and closing price of an asset to the trader. This means the difference is a positive amount the broker pays that to the trader and If the difference is a negative amount then the trader must pay the broker. a CFD is a good example of financial derivatives where traders can take advantage of the price movements of underlying assets without actually having to own an underlying asset
There are many countries which allow CFD trading such as: South Africa, United Kingdom, Canada and over 6 European countries. However USA does not allow this trading form due to strict regulation from the US securities and exchange commission.
Some Similarities Between CFD’s vs Binary Options
Both are derivatives
What this basically means is that these trading instruments are not like the normal Stock market or currency market trading. This is due to the fact that you as a trader will not have any actual connection or ownership of the asset you are making a trade on with both binary options and CFD. For example you will invest on the position of a google stock price whether it will be higher or lower than current price you entered. However you will not actually own any google stocks physically.
With binary options and similarly CFD. You are purchasing a contract based on a speculation of the price movement of an underlying asset in the future near or far. So you profit from the movement of the price and not the actual change in price. So with CFD trading speculating the price will rise is called “going long” while a falling price is known as “going short”. But with binary options these are known as “call” and “put” respectively.
Relatively small investments and stakes
Also another similar feature is the initial investment amount required to trade both binary options and CFD. This allows any person who is aware of the necessary risks to determine their financial standing start investing and become a trader.
Shorter trading periods
Furthermore both these forms of trading are more targeted at shorter time frames which is different from the more traditional financial instruments of trading. Additionally with CFD usually the expiration times for your trade range from a hour to a week. Binary options can range from 30 secs to a week. This faster trading frames are becoming even more popular. Because traders want to realize their projected profits quicker then months or years. In today’s fast paced world people a more to easier and faster methods of doing almost everything and trading is no exception.
Some Differences between CFD vs Binary Options
As much as CFD and binary options have their similar attributes. They also have differences. The best way to
make a choice is by knowing both and making a decision based on that and your personal preference and trading style.
Knowing the percentages of payouts or losses
A major difference between binary options and CFD is the knowledge of the potential payout or loss prior to making a trade. Binary options trading is quite transparent in this regard as everything is in front of you. They give you the percentage payout you will get in the case of a correct prediction of the market price. Furthermore you know exactly the amount you will lose in the case of an incorrect prediction. This a great for money management. The difference with CFD is that its more complicated and you have to wait for the trade to expire to actually know what is the amount of your profit or loss. This is because it works with the difference in entry and close price. Thus there is no way of knowing prior to making the trade as the trader cannot be certain on how severe the price action will be.
Risk and charges
In terms of charges CFD traders must pay extra money in broker fees and commissions on the trades the enter. This is so CFD traders can have access to all types of markets at a cheap cost as compared to some other financial instruments. Leveraging amount does depend on the fees and commissions which can be different depending on the broker you choose. With binary options you need not concern yourself with such. Because its straight forward no leverage, no fees and no commissions. You only need to decide how much you are willing to invest. Additionally leveraging makes CFD quite risky because your losses can go beyond the invested amount if the price movement is great in the opposite direction. Binary traders has no need for concern in this regard as you only risk the amount you trade, nothing more.
Furthermore many binary options brokers actually offers rebates/refunds on trades that are OTM (out of the money). Usually refunds rates are around 15% – 10% of the amount staked however this varies with brokers. The risk with CFD is higher then that of binary options in our opinion and most traders out there too. Certain binary options brokers may charge withdrawal fees but majority has great offers and free withdrawals as well. Depending on the broker you are with withdrawal fees are manageable.
As stated above USA and a few other countries does not allow CFD trading within their borders. Since USA is such a massive booming financial market. Many traders cannot use CFD to make profits but binary options trading is allowed with brokers who are regulated accordingly and approved to have traders from the USA. Hence binary options is much more accessible globally then CFD trading.
To Conclude CFD vs Binary Options
Both CFD vs binary options trading are quite similar in terms of the derivative form been that of a binary nature. However in our opinion binary options is a better choice instead of CFD due to the above mentioned facts. Furthermore binary options has increasing investment opportunities in terms of asset selection. Additionally the clear knowledge of payouts. No fees and commissions.
Risk and accessibility globally makes this the preferred choice for traders professional and novice alike. CFD trading is more suitable to hardened professionals of trading with high amounts to risk and can be a tad complicated. Binary options however can be traded from beginner to master level and is simple to understand. Just ensure you deal with a regulated broker as such on this site. Finally this CFD vs binary options post has highlighted what you need to know so check out the best binary options brokers below and start trading.
References and further reading
- The volatility surface: a practitioner’s guide (by J. Gatheral – 2011)
- Derivatives: principles and practice (by R.K. Sundaram & S.R. Das 2011)
- Commodity Option Pricing: A Practitioner’s Guide (by I.J. Clark 2014)
- Breaking barriers (by P. Carr & A. Chou – Risk, 1997)
- Credit Default Swap Index Options (by M. Jakola – 2006)