There are many trading options open for you if you are an investor and are planning to invest. These options may create confusion and misguide you, which can be very critical. With proper information and knowledge, you may find a way to make a profit from your investments. However, two of the most prominent and popular investment instruments are CFDs and Binary options trading. These investment instruments can be suitable for you to invest in. To have an understanding of what is what we must analyze these two investment platforms in detail.
In this article, we will give you a brief idea of Binary options and CFD. We will review the differences, pros, and cons, etc. In short, we will present a competitive brief on Binary vs. CFD trading.
Binary Options vs. CFD Trading
The idea of what CFDs and Binary options are can be very confusing for new traders. Choosing one of these two platforms can be a challenge. From the values of trading to profits and losses, you need to give some insight into which type of platform is suitable for you. Hence at first, we will inform you about each of these platforms in brief.
Binary Option trading
Binary options trading is a platform for investment where there are only two possible outcomes; either the investor gets a payout or pays for the loss.
In Binary options trading, investors bet on the value of an asset to reach a predetermined price with an expiry period. Investors can bet that the cost of the asset will go above or below the present value of an asset. If the prediction is correct, then the investor gets the asset along with extra profit. If the forecast is not accurate, then the investor walks with nothing.
For example, A stock of X company is trading at $66.65. A binary option with a trigger point price of $67 and expires tonight by 9 p.m. The investor can purchase the option for $35. If the stock price ends over $67, the option will pass the expiry period in the money, and the value will be $100. The trader makes $65 ($100 – $35).
If the option passes the expiry period and the X company’s stock price is below $67, the trader will lose the $35 he or she invested into the option.
If the trader was willing to put more investment, then the trader could make a change in the number of traded options. For instance, choosing four contracts, in this case, would take the risk to $140 and raise the potential of the profit to $260.
There are two forms of Options, they are:
- Cash or Binary nothing option: Here the venture pays you a fixed amount in cash or nothing
- Asset or nothing Binary Option: Here, the venture pays you the price of the underlying asset or nothing.
Advantage of Binary option trading
The advantages of Binary Options trading are:
- Simple Trade: The trading process of the binary trading option is very straightforward. Either you make a profit or a loss.
- High-profit percentage: In numerous cases, binary options traders make a high percentage of profit (45 to 75%)
- Fast trading: Binary trading options offer a trading expiry period for a very short time; it can vary from minutes and hours to maybe a day.
- Profit and loss concern: in binary trade, you know the amount of profit and loss you are going to have. This helps you to do risk management.
- Low initial deposits: Brokers are willing to open an account with a shallow initial deposit.
- Multiple asset trade: You can trade with numerous means of assets such as Forex, Shares or oil, gold, etc.
Disadvantages of Binary option trading
Along with the advantages of binary options trading, there are some disadvantages as well, and they are:
- Regulation of the market: the market of binary options is not well regulated because it is very new as a platform. Since the management is not, there are many unregulated brokers in the market. Hence there are many cases of scams, and some countries banned binary trading options.
- Loses: In binary trading, option losses are always more significant than profit.
The elaboration of CFD is a contract of difference. CFD is a trading instrument in which a trader can trade share, indices, forex, and other commodities. In this platform, a buyer and seller agree to a contract that speculates the asset’s price. And the buyer speculates the rise and fall of the value of the assets. CFDs enable investors to trade without actually owning the underlying asset.
The calculation of profit and loss lies in the difference in price when you enter and exit a contract, which means the seller enters into an agreement with a buyer and will pay the buyer the difference between the price at the opening of the contract and the price at the end. For loss, the buyer will pay the broker the difference.
The Advantages of CFD trading
- Profit at any market position: In CFD trading, a trader or investor can make a profit regardless of the value of an asset is increasing or decreasing. If a trader speculates the value of a particular asset will drop, then he or he can enter the market at a selling position. And if the speculation is the opposite, then he or she can call to buy the CFD.
- Wide range of market: traders are enabled to invest in shares, metals, forex, stocks, indices, and many other commodities.
- Trade on margin: by using the leverage from the broker, a trader can enter the market with a low initial deposit.
- Trade with no time frame: there is no fixed expiry date in CFD trading.
- Trade at any contract size: traders can trade at any volume.
Disadvantages of CFD trading
- Leverage can be a disadvantage: In margin trading, traders can make a lot of profit, but losses can be more significant. Therefore proper investment management is essential.
- Overtrading: due to the low initial deposit, traders may end up over-trading.
- No rights: CFD traders do not own the underlying assets physically, so they don’t have the rights for any issue placed by the company.
It is a common confusion for traders to have while they tend to choose a trading platform Binary options vs. CFD trading. And in this competition, we surely have a winner, and that is the trader. Both of these trading platforms are pretty much profitable and risky at the same time. It is only the trader’s position to choose which platform is wise to invest. In this competing Binary option vs CFD trading, there is no ultimate winner, which means one is not better or worse than the other. Only a trader knows what is better for him or her to invest.