Binary Options vs CFDs

Contract For Difference or CFDs are a product a number of current Binary Option traders use to trade before binary options were made available. Before Binary Options were invented CFDs were the fastest growing retail financial trading product in the global marketplace, they are now in danger of been overtaken by Binary Options which offers many benefits over CFDs.

CFDs are a contract between the broker and trader whereby the broker pays the difference between the current value of the asset and its value when the trade is closed to the trader. If the difference is negative, then the trader instead pays the broker the difference when the position is closed.

CFD traders can earn a return from rising or falling market conditions, just as traders can with binary options. Like binary options, CFD traders you do not own the asset, instead they are speculating on the price movement of an asset. By not physically owning the asset traders do not have to pay the associated costs of physical ownership such as account management fees, stamp duty nor do you have to wait days for the settlement to occur after a sale. Just like binary options, it also means that traders are able to sell the asset without having to own it and buy it back at a later stage, known as going short – trade a falling market. As with binary options, CFD prices mirror the real price of the asset in which traders are buying or selling.

CFDs are a highly leveraged product, enabling traders to enter new trades by paying just a small fraction of the total value of the contract, this can be as low as 0.5% of the face value of the trade. For example a $10,000 trade would only require the trader to have $50 (0.5%) available on their trading account. This leverage means traders can increase their return on investment compared to other forms of trading such as stock trading, however the higher leverage can result in losses that could exceed their initial trading deposit, not something a trader wants to happen.

The range of products CFD traders and binary option traders have access to it very similar, both cover forex trading, gold trading, oil trading, commodity trading, stock trading and index trading. CFDs are a lot more complicated to understand and trade compared to trading binary options.

Why Binary Options are a better short term trading instrument compared to CFDs:

  • CFD brokers charge commission
  • CFD brokers charge an overnight interest rate
  • Traders can get a margin call when trading CFDs – told to put more money on their account
  • Exact potential returns and loss with CFDs is unknown, unlike binary options
  • Binary option returns (e.g. up to 91% return in 60 seconds)

Binary options are often used as a short term trading instrument in Malaysia.

We hope this has helped you understand the difference between Binary Options and CFDs and should you wish to start trading Binary Options click here to open a free account with a the highest rated binary option broker for Malaysia.

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