Financial trading that takes place online is one of the biggest hits in financial markets. Such strong trend was never noticed before, and financial trading has become opened to everyone including students, housewives, doctors, nurses… This might not seem important, but in the recent past, it was reserved exclusively for financial experts, banking professionals and people rich enough to pay their services.
But, just because something is open for everyone, doesn’t mean that everyone knows how to utilize their position. For example, financial trading in any form requires great level of knowledge, and many traders still confuse certain products on the market.
On of the main confusions is regarding CFD trading and binary options trading. These popular instruments are available online to everyone who wants to trade them, but knowing your apples from oranges is of highest importance.
Binary Options vs. CFD
CFD is short for ‘Contract for Difference’ and it is type of trading offered by popular brokers like AvaTrade and plus 500. The difference is determined by the price of a certain asset, or better to say between the entry price and the exit price. The trader can select to either ‘buy’ or ‘sell’ a certain contract, as he is making speculations about future prices. If you believe the price will rise, it would be smart to buy more contracts. If you think the asset price will fall, it is a good decision to sell contracts you already have. Traders who make correct prediction get the price difference between strike and closing price.
CFD is considered to be somewhat more advanced than binary options trading. In Binary options trading there are no contracts that can be sold or bought – only trade. They are more similar to betting, as the trader can, in most cases, only trade the outcome, but can not act effectively during the entire process of price movement.
When it comes to binary options trading, all that trader has to do is simply predict whether or not the price of certain asset will go up or down. If he is right, he wins predetermined percentage of the amount invested. If he is wrong, the amount invested is lost. This type of trading can be done with brokers like IQoption.
Main differences
There are several differences that come between binary options and CFDs trading.
Risk Level Control
Every trader wants to control the risk his money is exposed to. When it comes to binary options, thigs are pretty clear – if you place $100 in a single trade that has potential payout of 90%, you can never lose more than the $100 you invested. The maximum payout you will get is $90. Simple math and pretty straightforward.
CFDs are, as mentioned, a bit more complicated as the final outcome depends on the moment when you entered the market, the moment when you are trying to sell the contract and the difference that comes as a result. Also, considering this more complicated nature of CFD, traders usually prefer to have a sheet where they follow their trades.
This doesn’t mean that CFD trading is less profitable, only more demanding, as it is asking for better analysis and more focus. This type of trading can still be very lucrative.
Investment Amount
The simple truth is that binary options are usually more acceptable to traders with smaller initial funds. Minimal deposit is rarely above $250, and there are brokers who require only $10. Also, fees and additional costs are rarely present. On the other hand, different fees and commissions are part of everyday life of most CFD traders.
Number of Assets
CFD offers traders variety of assets. These include bonds, forex, and many more. Binary options, on the other hand, offer also a variety of assets but they are traded different way. For example, even though many binary brokers claim that they support Forex trading, they are simply supporting currency trading that has nothing to do with forex.