When starting out in trading there can be some confusion as to which direction to take: binary options or CFDs? Today we will clarify all doubts by evaluating the most important differences between these two instruments, with the aim to help simplify the decision for our readers as to which of the two to start with. Obviously, when the time is right, both types of instruments can be used without any problems. In the meantime, make your choice based on your experience and your trading needs.
First of all, we will revisit what CFDs and Binary Options are.
Contracts For Difference (CFDs) are none other than a new type of futures that lend themselves extremely well to online trading because they make it possibile to negotiate (buy and sell) shares under the form of a CFD or, in other words, without actually taking possession of the title. This means that the process is more simple and much faster compared to the traditional trading of shares via a bank. At the same time, it is absolutely secure and regulated. CFDs follow the movement and price of their underlying asset, without any alteration. This means that if a share rises, then the value of the CFD also rises in the exact same proportion. CFDs are also available on currencies (Forex), indices, commodities and Exchange Traded Funds (ETFs).
With regard to binary options, however, they allow us to analyse an asset’s movement in very short timeframes that can be as brief as 30 seconds. Unlike share CFDs, the trader does not earn in proportion of the title’s growth, but rather they earn a fixed percentage in the case of a correct analysis of the direction (high/low or up/down). An option trader can “guess” even by a minimum amount and this is enough to earn them a profit of around 75% of the investment sum. With an investment of $100, there is a return of $175 ($75 net).
The first major difference lies in the experience required. In fact, while with binary options there is the need above all for a general knowledge of the various mechanisms and dynamics present, over and above the study of the trend movement on real time graphs, when trading CFDs the expiry times are longer (even in day trading) and the investments are larger. It is the presence of leveraging that requires time and attention before using them to their highest potential.
As has been pointed out numerous times on this site, we recommend using a demo account both for the purpose of learning and for that of improving technique. The difference in this case is that while CFD trading platforms offer free demo accounts, binary option platforms allow use of a demo account only on opening a real account with a minimum deposit that is generally between 100 and 250€.
Minimum Trade Amounts
This element is in favour of binary options for the first steps in trading: lots or units. Lots are the minimum amount that may be purchased of CFDs and vary from title to title. For example, you can purchase titles from company X with a minimum purchase of 10 lots, but you may find another company with a minimum purchase of 100 lots. This renders the process more costly and the investment decisions more crucial. With binary options this mechanism does not exist.
Short and Extra Short Timeframes
One vast difference between binary options and CFDs is in the expiry time of the title. While in CFD trading you decide when to sell (and this can be done even during the same day of acquisition), in binary options the expiry is predetermined. This means it is established beforehand, prior to taking the trade. In this way you know precisely the point in time in which the clock will stop and you will then know if your analysis was correct (in the money) or incorrect (out of the money). The expiry times can be from 30 seconds or longer, so you could actually make a profit in just 30 seconds.
To sum up, we can say that while trading CFDs requires a certain level of experience, that can even be acquired to a degree on the demo platform, in binary option trading it is all decidedly more simple. In either case, whichever method you choose to go with, we highly recommend a few weeks of practice on your demo platform. Trading binary options is definitely simpler, but we are certain that you would gain much satisfaction also in the trading of CFDs when you so choose to use this method.