As you may have read in countless websites and financial markets forums, binary options and CFDs (Contract for Difference) are the most traded financial instruments by retail traders. These two products share some similarities but also diverge in many ways. We propose to list below the key similarities and differences between binary options and CFD trading.
Similarities between binary options and CFD
There is one common similarity that may explain the success of binary options and CFD among retail traders. Both products are highly leveraged financial instruments. It means that you will be able to execute very large trading positions by supporting them with just minimum deposits. This is the purpose of financial leverage. This leverage enables retail traders to benefit from small moves in asset prices while generating high profits in a short period of time. This constitutes the single most important advantage of both binary options and CFD.
Moreover, both instrument are derivatives financial products. It means that their value is conditional to the value of an underlying asset. This underlying can belong to every asset classes (equity, forex, commodities, indices…). As derivatives, these instruments are traded Over-the-Counter (OTC). It is a contract signed between the retail trader and the broker. This is why you should be extremely cautious when choosing your binary option broker to avoid scams. Don’t hesitate to check our ranking of the best regulated binary option brokers in the United Kingdom.
Differences between binary options and CFD
Nevertheless, there also exist lots of differences between binary option and CFD. First of all, while a binary option is a fixed odds financial instrument (you either earn the return or lose the invested amount), a CFD is linearly leverage financial products. This means that you will simply multiply the underlying asset performance with a CFD. If this performance is negative you can face huge loss with CFD. This is the most important difference. With binary option, you cannot lose more than your invested capital, with CFD, you can face virtually unlimited losses.
The other key difference between binary options and CFD is that the latter has no maturity. Indeed, you can keep an open position on a CFD as long as you deem it necessary. On the contrary, binary options are short-term financial instruments with fixed maturities (60 seconds, 10 minutes, 1 hour, 1 day…). If you want to do CFD trading, you can have a look at this avis Plus500.