Binary Options vs CFD Trading | BinaryOptionsInvestor.net (2024)

There are several vehicles that can be used to profit from the price movements of financial assets. Binary options and CFD (Contracts for Difference) are two products that are both relatively new to the retail markets and offer a different approach to profiting from financial investments.

Here we look at a direct comparison between these two financial instruments, which at first glance seem quite similar, but in reality offer very different proposals to the trader.

Binary options trading

The binary option is a simple digital contract that offers a fixed payout upon expiration. The payout is based on the expected future price movement of an asset relative to the entry price.

No direct investment is made in the underlying asset itself as the contract is a simple bet between the broker and the trader.

A payout is made at the agreed expiration time if the trader has successfully predicted the direction of the price movement. This is known as the switch ending in 'in the money'. The alternative scenario is that the trader cannot predict the move correctly.

The contract ends "out of the money" and the bet is lost. It ishow binary options brokers make money.

Example -

You have chosen a 'higher' contract based on the expectation that the Google stock price will end at the end of the trading day. You open a $100 contract with an 85% payout.

The price closes above the level at which you entered the contract, so you receive a fixed return on your original investment

100 USD * 85% =$ 85

CFD-handel (Contract for Difference).

As with the binary option, a CFD does not imply a direct investment in the asset to be traded. The contract is concluded between two interested parties who agreeexchange the differencebetween the opening and closing price of a contract.

Contracts can be set to go 'Long' or 'Short' on the underlying asset they correspond toCall and put contracts used in binary options. They are often used by traders to hedge any physical positions they have in assets.

CFDs are a leveraged product, meaning that unlike a direct investment in shares, you only need to stake a small percentage of the total contract value. However, as a result, you will be liable for losses greater than your original deposit.

Example -

You have chosen to short a share price of €1.00 with 1000 CFDs. You deposit a margin requirement of $50)

The shares fall and you close the contract at €0.81. You pocket the difference between the opening price and the price at the end of the contract

($1,00 - $0,89 = $0,19) x 1000 =$ 190

Similarities and differences

On the surface, there are a number of similarities between binary options and CFDs. For example, both allow you to access a wide range of different markets and start trading with small amounts of capital.

Despite their outward similarities, there are fundamental differences between binary options and CFD trading. Perhaps the most obvious of these are the different levels of risk and reward associated with each product.

OfThe risk to reward of binary options is fixedon each switch at the time of purchase. The trader knowsexactly how much profit they will make(or lose) from any contract. This allows an informed decision about the merits of each transaction prior to the actual purchase of the contract.

On the other hand, payment and liability have run outContract for differenceis unknown. Unlike most binary options, the CFD contract can be terminated at any time. This can be used to lock in profits or minimize losses. But the key point to note is that the higher risk of these contracts allows for higher rewards, but just as goodgreater loss.

In conclusion, there are pros and cons to each of these two types of investments. BothBinary options and CFD tradingoffer a fantastically low-cost way to gain exposure to a wide range of financial assets. However, the leveraged nature of CFD trading poses greater risks to the trader.

Unlike the binary option contract, risk is not defined for each position taken, leaving profit and liability to the movement of the markets. For this reason, binary options will likely prove to be a better solution for investors who want to trade with a certain level of capital and know their risks in advance.