Binary trading vs. CFD trading: What is the difference?
14 Aug 2018
Contracts for difference (CFD) and binary options are some of the most popular trading instruments available to online traders.
Many marketers wonder how these tools differ and which ones to choose to win better.
To understand it, we must analyze in detail the two trading platforms and put them side by side to see exactly what is what.
In this article, we will briefly review the similarities between CFD trading and binary options trading and we will make a more thorough assessment of their differences and we hope to draw a rational conclusion.
What Are CFD’s and Binary Options
Many beginner traders confuse these concepts. Therefore, first of all, we want to inform you briefly about each of these forms of trading in the stock market. So, what are then CFD’s and binary options?
CFD’s (Contracts for Difference)
CFD means contract for difference. In short, a CFD is an agreement between you and a broker to pay each other the difference between the price of an asset (such as gold, EUR/USD, Microsoft shares, etc.) at the time the contract is made and its subsequent price when it decides to terminate the contract, that is, close the transaction.
It means that you do not own the real asset, but you make a contract with the owner (in this case, the trading platform) to resolve the difference between you when the deal is over.
This opens the door to many opportunities, such as the fractional ownership of shares, short shares in assets that do not offer them and much more.
Binary options are often referred to as "yes or no" investments. If you believe that an asset will be quoted above a fixed price, you are predicting a "yes" and buying the binary option. If you believe that an asset will fall below a fixed price, you are forecasting "no" and selling the binary option.
There is a low barrier to enter. A binary option contract will not cost more than $100. You are not buying an underlying investment or even the option to buy an underlying investment. You are simply placing a bet on how the price of that investment will move.
These contracts always close at $0 or $100; You win or lose. If it correctly predicts the movement of the price, it is on the winning side of the operation, and the person on the other side of the contract, who incorrectly predicted, is on the losing side. Your profits or losses can not exceed $100 in a single contract, which means that your exposure to risk is limited.
Limited, but far from not existing. You can negotiate multiple contracts to increase potential profits; but at the same time the size of the possible losses increases.
To perform a binary option you must follow three main steps:
- Decide on an asset or market to trade.
- Decide an expiration date or time for the option to close. Most trading platforms allow you to sort by expiration date, so you can see contracts that expire within the next hours or days. Most contracts will expire at the end of the trading week, except those linked to economic events.
- Decide if you want to buy or sell the binary option, according to the exercise price and the expiration date. The exercise price is essentially a line in the sand. If you believe that the asset will be above the strike price when the contract expires, buy the binary option. If you believe that the asset will be below the strike price, sell the binary option.
Similarities between CFD’s and Binary Options
CFD’s and binary options are similar in the following ways:
- They are derivatives: it is not necessary to own the underlying asset to trade in the asset.
- They have short trading periods: for both binary options and CFDs, traders can select trading periods from one hour to a week depending on their business objectives.
- Predicting the movement of prices: both trading instruments involve making predictions about the market prices of the underlying assets.
Differences between CFD’s and Binary Options
Although CFDs and binary options have some similarities, these two trading instruments are also markedly different. The main differences include:
In binary options trading, the operator is usually aware of the possible loss or gain that will be incurred depending on the movement of the price of the underlying asset. However, with CFD operations, it is not possible to determine in advance what you can earn or lose with the fluctuation of market prices. This is because CFD transactions involve negotiating the difference between the entry and exit prices of the underlying asset.
Advanced traders can earn more dividends by trading CFD. However, the level of risk in CFD trading is considerably higher than the binary options trade.
CFD transactions, unlike binary options trading, involve the payment of commissions and fees for each transaction you make. This is because CFDs are financed with borrowed money, so traders can trade with numerous underlying assets at a reduced price. Each broker has its own commission structure.
When it comes to binary options trading, traders are not required to pay fees or commissions in addition to the initial investment. No fees are paid, even if the operation ends without money, that is, even if you lose. In fact, many binary options brokers offer a return of between 10 and 15% of the money exchanges.
Instead of reimbursements, CFD traders can protect themselves against losses by "stopping" their own losses. But stopping losses can only be applied when losses are already imminent.
Range of Tradable Underlying Assets
CFD trading gives you access to a much broader set of bases that includes bonds, currencies, indices, etc. On the contrary, binary options trading requires the existence of an underlying asset; This currency and the average index can not be negotiated using binary options. If you are looking to access more bases to operate, CFDs offer a better option.
Conclusion: Do We Have a Winner?
Yes, of course we have a winner: the trader! The trader is the final winner of this "battle" between OB and CFD because with this new CFD trend, we have more options and more negotiation styles. We do not believe that one is better than the other. They only have a few differences and operators will have to decide which style suits them best. If you are a trader who wants quick wins of 60 seconds, then binary options are your game. If you do not want to worry about where to put your "Stop Loss" and "Take Profit", once again, the binaries are for you.
On the other hand, if you are a patient operator that wants to keep good trading for longer, then CFDs are for you. Because in the end, the patience of the trader who chose this tool, is much better rewarded. If the transaction closes successfully, you will earn much more money, and this is the goal of any trader!
In the end, it's up to you if you want to invest a little time and learn a new way of trading or follow the known path.
If you decide to try the CFD trade, Libertex will be happy to offer you the best conditions. Our CFD service covers a wide range of asset classes. Get more information about CFD operating costs. Also for beginners, we are pleased to offer a demo account, through which you can practice CFD trading without taking any risk.