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Author: Shelly Burns
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Shelly Burns

Binary vs CFD - The Pros And Cons

When choosing whether to trade in binary options or CFDs, there are some things to consider. From the costs of trading to payouts and losses you also need to give some thought to the type of instrument that is suitable for you. Choosing the correct instrument requires you to understand the differences between the two types of trading.

CFDs, or Contracts for Difference, are an agreement between you and the broker to pay the difference in an asset between the start price and the closing price. Binary options are a simple yes or no "bet" on how the cost of an asset will finish at the close of the trade. While different they do hold several similarities.

Guide Summary

This article covers the relative advantages and disadvantages of CFDs versus binary options and advice on how to choose, which is the best mechanism for your trading needs.

Binary options provide more certainty of potential gains and losses than CFDs. CFDs are risky as the amount that an asset could rise or fall is significant and could result in big losses.

Binary options require fewer fees and commissions than CFDs, in part because commission for binary options is calculated from the source. In the UK, binary options are taxed less than CFDs.

Both trading instruments involve inherent risks. There is arguably more potential profits with CFDs, but this is accompanied by higher trading costs and more risk associated with the trade.

Trading Payouts And Losses

It is far easier to predict the payouts and losses that you will achieve with binary options than it is with CFDs. The difficulty with CFDs is that no one can predict how different the price will be from the entry point to the close. There is no limit to how far the price will rise or fall, and you are in a contract with the seller (the broker). You buy the asset and if the price rises, they pay you, if it plummets you owe them.

The price could go from 0 to 10,000 or vice versa. A move in the wrong direction and you end up with a hefty bill. With a binary option, you either win, or you lose, and you can calculate the payouts before you enter the trade. If you win, you win the same as you would regardless of whether the price rises a tiny amount or an exponential amount.

You get back your initial stake plus your winnings, and if you lose, you get nothing. When you lose a CFD trade though you will owe the broker an amount, this cost gets calculated at the point of close, it is possible to benefit from higher profits with CFD, but this is generally achieved by the more advanced trader who has more experience and is not averse to the risks.

The Costs of Each Method

Binary vs CFD

With every CFD trade that you place, there are fees and commissions which you won't incur with binary options. With options, you don't pay any fees past the amount that you trade regardless of whether you win or lose. Any commissions get deducted at source before your calculating your winnings.

There are some fees to consider all types of trading which are more to do with third party payment providers and currency conversions. There is also a tax element with both instruments are taxed differently.

Taxation varies depending on your country of residence so you should check what applies to your country first. In the UK, CFDs are taxed as capital gains whereas binary options viewed as gambling and therefore any profits are not subject to income tax or capital gains tax.

For UK residents, this may put binary options traders at an advantage over those who choose CFDs as they get to keep more of their profits.

Which Trading Type Suits You

Both trading instruments are derivatives which means that no one owns the asset. You can only predict the price or how the asset will finish by the close of your trade. They both have short expiry times, and both involve risk as you are predicting how the asset will perform. Which type of trading suits you will depend on your comfort zone and how much control you like to have plus your personal preference.

While neither trading tool offers a great deal of security, at least with binary options, you have more of an idea of your exposure. With CFDs, the only way in which you can protect your exposure is to set a stop loss order. Another factor to consider is time.

With options, you can trade quickly with 60 second expiry times, and you don't have to wait long to learn the outcome and whether or not you have been successful. With CFDs, it requires a bit more patience, but the trader is rewarded well if the trade is successful.

Options are better suited to those who like less of a risk and are happy with the slow and steady gains whereas CFDs could be more suited to those of you that are risk takers.

For UK residents, this may put binary options traders at an advantage over those who choose CFDs as they get to keep more of their profits.

The Final Pros And Cons

Overall when summing up binary options vs CFDs, in terms of which are better, they are quite evenly matched. Both offer excellent benefits and equally both have their drawbacks. It is fair to say that there are a broader set of tradable assets with CFDs including bonds and indices than there are with binary options.

A significant consideration is also the amount of money you can make. With options, you are only ever going to make a certain amount on each trade. With CFDs, the potential winnings are so much higher, and you can leverage your margins to increase your exposure. While this can make the wins big, it can also have the same impact when it comes to losses.

With binary options, the return is lower than the loss meaning that to make a profit; you need to make more winning than losing trades. You also cannot use Stop Loss orders to try and limit your losses – a loss is a loss. With not a great deal to choose between the two, it very much comes down to personal preference.

Meet The Author
Shelly Burns
Shelly Burns
Broker Specialist

Shelly is proud of her current position as Head of Brand for a well-known organisation that owns several brokerages in the trading sector. She’s consulted for us since 2015 and readers can benefit from her insider knowledge of how brokers work.

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