CFD trades and Binary Options trades certainly have their similarities, but they also have some very clear differences. Often times, traders are curious as to whether they can utilize the two forms of trade in tandem with each other to maximize their returns on their investments.
To understand if this is possible we must take a comprehensive look at the two trading platforms and put them side by side to see exactly what’s what.
In this article, we will briefly go over the similarities between CFD trading and binary options trading and a more comprehensive assessment of their differences and hopefully draw out a rational conclusion.
So before we dive into the differences between binary options trading and CFD trading, let us reacquaint ourselves with their similarities. To start off with, they are both derivative forms of trading. They are both a departure from the stock market and currency market trading. Secondly, they are both small scale investments and carry significantly lower risks. Both with CFD trades and binary options trades, there can only be two outcomes and two main options. The trading time frames involved with these two forms of trading a feverishly quick compared to other forms. To start trading in binary options or CFD does not require a substantial initial investment to get you started.
How is CFD trading different to binary options trading?
First off, awareness of your profits or losses. With binary options trading, this is a clear cut issue. All the information you need to know in the event of a profit or loss is displayed before you call an option on a trade. You will know before the time of expiry, the pay-out rate you will receive if your prediction is accurate as well as the loss you will incur if your prediction is not.
In the case of CFD’s you will be in dark regarding your exact percentage of profit or loss until the time that the trade expires making it altogether trickier to deal with. This is by default, a result of the difference in the entry and the close price which can vary. So traders cannot know for sure where their investment will go till the absolute ending of the trade.
In order to be involved in different markets at a relatively cheaper rate, CFD trading requires traders to pay extra commissions for brokers as well as trades. These fees are not fixed as such and can change with each broker. This is unheard of in binary options trading circles. There are no commission, fees or leverage whatsoever.
The problem with leverage in CFD is that in the event of a trade backfiring, your loss can exceed your initial investment and that can be a nasty defeat. With binary options, a loss can never go past the initial deposit.
What’s more, binary options brokers will actually propose to refund a percentage of the losses incurred by traders if they end up out the money. That percentage is usually around 10-15% but it certainly is something.
On a global scale, binary options trading is the wider form being practiced. In the United States, for instance, CFD trades are not legal although binary options are so long as they are licensed and regulated.
Conclusion – CFD Trading vs Binary Options Trading
While there are similarities, after putting them side by side, it would seem that binary options trading comes off as a less risky form of trading to engage in.
Perhaps the most logical conclusion one can draw from the differences is that binary options trading is the more popular method and more risk friendly, especially to early traders. CFDs are more the territory of experienced traders who have played and figured out how to stay in the game many a time.
Differences Between CFD Trading and Binary Options Trading
One of the key differences between CFD trading and binary options trading lies in the way that profits and losses are determined.
In binary options trading the potential profit or loss is predetermined before the trade is made.
Traders are aware of the exact pay-out rate they will receive if their prediction is correct as well as the loss they will incur if their prediction is incorrect.
However in CFD trading the exact percentage of profit or loss is not known until the trade expires.
This is because the entry and close prices can vary making it more challenging for traders to gauge the outcome of their investment.
Additionally CFD trading often involves paying extra commissions to brokers and for trades whereas binary options trading does not have any fees or leverage.
This difference in cost structure can impact the overall profitability and risk exposure for traders.
Overall the differences in profit and loss determination and cost structure make binary options trading a more straightforward and potentially less risky option for beginners while CFD trading is often favored by more experienced traders.