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Nearly half (44%) of new investors in 2020 focused on short-term profits. But in 2021, only around 28% were interested in reinvesting the same way.
So, what caused this shift? The desire to manage risks better and build long-term wealth using strategies backed by education and professional help.
Sure, profiting from short-term trades is a valid goal. However, understanding when to hold or release positions is essential, especially when trading volatile instruments like CFDs (contracts for difference) and options.
Suppose you’re a newbie trader who wants to trade derivatives (trading instruments whose values depend on the underlying assets’ worth). In that case, you likely have heard of CFDs and options and want to know their similarities, differences, and unique uses.
On the other hand, if you’re an experienced trader, you may already be familiar with CFDs and options. If so, you probably want to know how to maximise these trading instruments’ features without risking beyond what you can afford.
This article provides a comprehensive breakdown of CFDs and options to help newbie and professional traders choose the ideal instrument based on their skill set, risk tolerance, and preferences.
Read on and learn strategies and risk profiles for CFDs and options trading.
CFDs vs. Options: Which One to Use and When
The ideal time to use each of these trading instruments depends on the individual’s current trading approach.
People usually use CFDs to profit from short-term market movements and options if they want to hold long-term positions.
That said, there’s no rule prohibiting CFD traders from extending their trades and options traders from buying short-term contracts.
Key Takeaways
Here’s an overview of how CFDs and options operate:
- CFDs and options are two legitimate ways for investors to profit from market fluctuations.
- CFDs and options are leveraged derivatives. As leveraged products, investors can trade them with less capital than when holding physical assets. As derivatives, their values depend on the underlying asset’s price movement.
- CFD trading allows traders to trade without owning assets. In contrast, options trading allows traders to acquire (buy) or release (sell) an asset.
- CFDs are financial instruments that let traders buy or sell contracts based on an underlying asset at any time, provided the market is open.
- Options do not obligate the investor to buy or sell a particular security (another word for asset) at a predetermined price and time.
CFDs vs. Options: Key Differences
As you’ll see in the following sections, CFDs and options differ in many ways. However, one primary difference is that CFDs never expire (you can hold positions for as long as you want), while options do.
Understanding how CFDs and options differ is crucial when determining which trades to place and when. The following sections explain more ways CFDs and options diverge.
Trading Style
Trading style refers to your overall approach towards concerns, like how long you should hold positions open or how frequently you should trade.
Here are three well-known trading styles:
- Day trading: Day traders actively trade during the day, often as a full-time job. It capitalises on short-term price changes and closes all positions before the close of the trading day.
- Swing trading: Swing traders usually open positions, hold for days to weeks, and sell — ideally with a profit. They decide when to buy and sell based on sudden price changes called price swings.
- Position trading: Position traders prefer to hold contracts for a long time — usually months or years — ignoring minor price swings to capitalise on long-term trends.
As mentioned above, people usually trade CFDs to profit from short-term market movements. So, CFD traders will likely day trade or swing trade.
Meanwhile, options are often long-term investments. So, options traders will likely prefer position trading.
Market Conditions
Options and CFDs can perform well in volatile markets. However, CFD traders typically aim to profit from quick price shifts. In contrast, options traders typically seek higher returns from more significant price swings.
Possibility of Ownership
With options, investors can own the asset on which their contracts are based. CFDs do not have this feature. Options traders exercise their rights via a call option to acquire the specific asset.
How to Take Advantage of the Market
CFD and options traders take advantage of the underlying market differently. CFD traders capitalise on the market price movement. Options traders’ opportunities derive from the contract’s time and intrinsic value.
Product Pricing
CFD pricing is straightforward as it directly derives from the underlying share price movement.
On the other hand, options pricing considers market forces and complex mathematical models to determine theoretical prices.
Below are five factors that affect options premium (total value of the options contract):
- Dividends and interest rate: These indicators represent the cost to carry shares in an underlying asset.
Cost of carry indicates costs incurred to maintain the carrying value of an investment.
Costs include opportunity costs for holding positions, such as potential interest received for alternative investment and outright share ownership or interest paid for a margin account.
Pricing also depends on the option’s hedged value, including dividends from stock and interest received or paid for stock positions used to hedge options.
- Implied volatility: This factor refers to the market’s forecast of a probable movement in an asset’s price.
Implied volatility reflects how much the market expects an asset’s price to change. Higher expected changes usually mean higher option prices.
Note that implied volatility’s effect is subjective and challenging to quantify.
Volatility measures a contract’s underlying asset price’s uncertainty (risk) or variability.
Higher volatility projections indicate stronger expected downward or upward fluctuations in underlying price levels.
This expectation often results in higher option premiums for puts and calls alike.
- Strike: The strike price (or strike) is the pre-agreed price at which you can buy or sell a specific asset.
An option’s premium (time value plus intrinsic value) generally rises as the option gets further in the money.
A call option is “in the money” (ITM) if the strike price is lower than the current market price.
- Time until expiration: Expiration dates also affect the product pricing of options.
The nearer the options contract is to its expiry date, the likelier its time value levels decrease for puts and calls.
Calls allow the holder to buy the underlying asset, while puts will enable them to sell.
- Underlying price: Like other derivatives, options prices depend on the underlying security’s price shifts.
Suppose the value of the underlying asset increases. In that case, a call (buying) usually becomes more profitable.
Transaction and Financing Costs
When trading CFDs, you pay transaction costs, such as bid-ask spread, overnight swap fees, or a small market exchange commission.
The payment amount depends on the financial service provider’s policy and your registered account type. When trading options, you typically pay the broker commissions for executing a trade on your behalf.
OTC v. Central Exchanges
CFDs are over-the-counter financial products not listed and traded on a stock exchange. You usually trade them through a brokerage firm.
In contrast, most options are traded on exchanges. However, OTC options are exchanged between private parties (between the options buyer and seller).
Similarities Between CFDs and Options
Let’s delve into these similarities in the following sections to get a better grasp of CFDs and options.
Both Are Derivative Instruments
A CFD is a contract between the trader and their CFD provider stipulating the amount to be paid upon contract closure. This product lets investors or traders profit from the underlying security’s price movement without owning it.
Likewise, an options contract is an agreement between two parties (buyer and seller) to facilitate a possible deal involving an underlying asset.
Both Allow Leverage
CFDs and options let you access the underlying asset at a lower cost than direct ownership. This mechanism is called leverage in trading.
Leverage allows investors to borrow capital to upsize their trading positions.
Both Have Flexible Financial Derivatives
CFDs and options allow for various markets and asset classes as the underlying security.
For example, Taurex provide traders access to more than 500 CFDs across shares, indices, forex, and commodities. Other brokerage firms offer fewer markets to trade.
What Are CFDs?
A contract for difference (CFD) is a derivative contract between traders and a counterparty (chosen broker) that requires them to trade the difference between the underlying asset’s opening and closing prices.
How Do They Work?
These financial instruments work by mimicking or simulating the underlying market.
The term “underlying” indicates the index, commodity, share, or other financial products on which a derivative like CFD is based.
The value of the underlying asset determines the derivative’s value. CFD traders profit or lose based on this share price movement.
Here’s an example of a profitable CFD trade to help you better understand this contract:
A trader plans to buy CFD on a specific ETF (exchange-traded fund) that tracks the FTSE 100 (Financial Times Stock Exchange 100) Index. The broker has a 2% margin rate, requiring a 2% down for the trade.
The trader then acquires 100 shares of the ETF for 2,000 pence (p) per share for a £2,000 position. (Note: 1 pound = 100 pence)
Position value = Number of shares Price of each contract
Position value = 100 2,000p
Position value = 200,000p or £2,000
In this case, the trader’s initial payment to the counterparty is only 2% or £40:
Initial payment = Position value Margin rate
Initial payment = £2,000 2%
Initial payment = £40
What if the ETF’s current price becomes 2,200p per share a few hours later, and the trader closes their position? In that case, the price has moved 200 points, and the gross profit becomes £200.
Gross profit (earning minus commission and other transaction costs) = [(closing price − opening price) number of shares]
Gross profit = [(2,200p – 2,000p) 100]
Gross profit = 200p 100
Gross profit = 20,000p or £200
Sometimes, you must pay the counterparty a specific commission depending on your account type. Higher commissions result in less net profit for traders.
What Is CFD Trading?
CFD trading is an advanced trading method that many experienced traders use. CFDs are not physical assets that holders own. Instead, they are contracts that track the underlying asset’s price swings.
For example, you can use CFDs to bet on whether the platinum’s price rises or drops instead of selling or buying actual platinum bars.
What Are the Costs of Trading CFDs?
Margin trading lets you have full market exposure for a fraction of the trade’s total value.
For margin trading, Taurex offers the following leverage ratios based on account type:
- Standard Zero: 1:1000
- Pro Zero: 1:1000
- Raw Account: 1:1000
With CFD trading, you only have two price options based on the underlying security’s market worth: the buy price (offer) and the selling price (bid).
How Do You Make a Profit With CFDs?
Suppose you buy or sell a CFD contract based on your prediction regarding the underlying asset’s price movement, and the market moves in your favour. In that case, you profit from your trade.
How much money you earn or lose on CFDs is calculated by getting the price difference from when you entered your position to when you exited it and multiplying the difference by your entire position size.
CFD Trading Basics
Here are four takeaways from our CFD discussion:
- CFDs are paper contracts. You do not own the underlying asset when you “buy” a share.
- CFD trading lets you invest more in various markets at once because you only have to pay a portion of the underlying asset’s value to trade.
- You can go short (sell contracts) with CFDs anytime. You do so if you hold a short position.
- Since you’re taking out a loan for most of the share’s cost, your ROI will be magnified if the share’s price rises. The exact increase in value applies to losses.
What Are Options?
Financial options are contractual agreements involving two parties. Unlike stocks, these instruments give owners the rights (but not obligation) to buy or sell the underlying asset.
Some option contracts are OTC, meaning two parties trade them privately without going through a regulated exchange.
The following sections focus on conventional options contracts.
How Do They Work?
Each option contract has an expiration date.
Suppose the price move you forecast does not happen within a specified period. In that case, you will lose your initial investment.
You can learn how options work by paper trading using a demo account before you trade in real time.
Paper trading lets you exchange various options and implement strategies for any underlying security that offers options, achieving two goals:
- You can see a simulation of how different options operate in real time.
- Seeing what could happen, in turn, helps you pick the best option, design the optimal strategy, and manage unexpected situations.
Call Options
A call option is a contractual agreement between a seller and a buyer to purchase a particular stock at a set price until the contract expires.
You must pay a premium if you decide to purchase a call option. This per-share charge is your maximum potential loss on a call option.
Put Options
Put options give the holder the right (but not the duty ) to sell — or short sell — a particular size of shares of the underlying stock at a pre-agreed price by a particular date.
Suppose you put options on a commodity that you bought, and the price of the commodity falls. In that case, the put option gains in value, thus offsetting any losses and enabling you to make informed decisions about your asset ownership.
What Is Options Trading?
As mentioned previously, options are derivative contracts that give holders the right (but not the obligation) to purchase or sell securities at a specified price.
Suppose the contract terms become more favourable than the prevailing market conditions. In that case, the option’s price will likely increase. The options trader profits if they sell the contract at the current market price.
Here’s a real-world example to better understand how options trading works:
Let’s say “1 XYZ $200 call” lets you buy 100 shares of company XYZ at $200 before the options contract expires. If XYZ’s share price rises to $250, the potential call profit is a minimum of $50 per share.
$250 (current share price) − $200 (strike price) = $50 (intrinsic value)
Options contracts’ values also depend on time value. For example, long-term options contracts tend to get pricier as they approach expiration.
This price increase happens because the holder has more time to wait for the stock to move above or below the strike price.
Implied volatility goes up when investors expect the stock to move drastically. This scenario usually occurs following an earnings announcement when an asset performs better or worse than most anticipated.
Option prices go up when there is a greater likelihood that the stock will rise or fall.
What Are Traditional Options?
People add the adjective “traditional” to some types of options to distinguish them from exotic options.
Traditional options let the trader buy or sell (with no obligation to do so) an underlying asset, such as a forex (FX) pair, index, commodity, or stock, at a predetermined price within a fixed timeframe.
Meanwhile, exotic options are contracts that differ from traditional ones regarding expiration dates, payment structures, and strike prices.
Investors typically trade exotic options through the over-the-counter (OTC) market to cater to specific requirements.
Options Trading Basics
Here are seven essential terms you should know when trading options:
- Expiration date: This is the date when your rights to the contract expire. Expiration dates can be weekly, monthly, or quarterly, depending on the type of contract you acquired.
- Market quote: In trading, market quotation or value is the current price at which an underlying asset, such as a commodity or stock, is traded.
- Multiplier: This number determines an options contract’s value and how much capital you must invest in an option.
- Option deliverable: This term refers to the number of shares or the amount of money (for index options) and the name of the underlying asset you can exchange.
- Strike price: A strike refers to the price at which you can transfer (sell) or acquire (buy) an underlying asset in an options contract.
- Premium: The option premium is the total amount traders pay for the right to trade given a predetermined time and a set price. You can calculate premiums by adding an option’s time value to its intrinsic value.
Time value depends on the options contract’s expiry date. The sooner an option expires, the less time the underlying market has to reach or exceed the strike price.
Intrinsic value means the difference between the option’s strike price and the underlying market’s current value.
- Underlying security (also known as the underlying): The instrument you purchase or sell on which the option value is based.
Why Trade CFDs?
People trade CFDs to capitalise on market price movements without owning underlying assets.
A CFD’s value is not based on the asset’s actual value but on the price difference between the trader’s entry and exit positions.
Advantages
CFD trading can be advantageous for several reasons. The following segments outline these features to help you know whether CFDs fit your trading objectives and strategies.
Similarity to the Underlying Market
CFDs work by mimicking the underlying market. So, CFDs heavily depend on the underlying market’s trend. As such, the CFD pricing is straightforward — each contract’s value depends on the asset it is based on.
Transparent Pricing
In CFD trading, contract prices reflect the underlying asset’s price movements. For example, an Amazon CFD’s value will drop or rise in sync with Amazon’s share price.
The price of other contracts is calculated based on the underlying asset’s price plus various market- and contract-related factors. This added consideration makes these contracts more complex.
For instance, options prices depend on premiums, expiry dates, and market volatility, aside from the underlying asset’s price.
Some brokerage firms charge a general commission, while others charge a commission on each trade. Other CFD trading-related expenses include the following:
- Bid offer spreads (price differences between a security’s bid and ask price)
- Daily and overnight holding charges
- Taxes (depending on the location in which you and your counterparty operate)
- Account management fees
No Expiries
You can hold positions indefinitely when trading CFDs since these contracts do not have expiration dates in many markets. This feature can benefit you if you want flexible trading conditions.
Meanwhile, some CFD contracts may have expiration or rollover dates, especially for commodities and indices. This can vary depending on your broker and the specific CFD contract.
Leverage
CFDs offer higher leverage than typical trading. The margin requirement for conventional leverage in the CFD market usually ranges from just 2% to as high as 20%. Lower margin requirements help reduce opening prices and increase traders’ possible returns.
However, it’s essential to note that the specific margin requirements can vary significantly depending on the asset being traded and the broker.
Choice of Markets
CFD trading lets people trade across a wide range of markets.
For example, Taurex offers 500+ CFDs across commodities, FX, indices, metals, and shares. You can trade the global market using only one platform.
Our platforms feature resources and tools to facilitate your CFD trading journey. These resources include news and commentaries, technical indicators, and margin alerts.
Disadvantages
CFDs appeal to many investors as alternatives to mainstream exchanges like stocks and ETFs (exchange-traded funds). However, these derivatives may have downsides.
For instance, the CFD market has less regulation than other financial sectors. So, instead of considering liquidity or government status to assess a CFD broker’s trustworthiness, CFD traders often examine the broker’s track record, stability, and financial strength.
CFD markets also run at full speed and require constant monitoring, so traders typically take significant risks when they trade CFDs.
But you don’t have to be in front of your screen tracking market fluctuations 24/7.
Suppose the underlying asset’s value drops, and you can’t compensate for the price difference. In that case, legitimate CFD providers can close your position, preventing you from paying the loss due to the underlying asset’s price movement.
Why Buy or Trade Options?
Investors who can and want to risk more in pursuit of higher returns trade options. These contracts let them invest in various assets without total capital commitment.
CFD traders might also want to include options trading in their existing trading strategy to diversify their portfolio.
Both options and CFDs offer leverage and flexibility. But unlike CFD traders, options traders speculate on option prices, a less risky venture (to some) since options also depend on the contract’s intrinsic value.
Despite the complexity, options can provide novice or experienced traders with a more favourable reward-to-risk ratio than CFDs.
Advantages
Some traders may find options a more advantageous derivative than CFDs. There are several reasons why they might find it the case. Below are some of the potential advantages of options when compared with CFDs.
Limited Risk
When buying a put or a call option, the investor’s risk is capped at the price they paid for the premium.
If the underlying market trends in the direction opposite their trade, they can just let your option expire. Consequently, they only lose the premium. Note: This case doesn’t apply to selling options.
In a CFD trade, losses typically increase as the market moves against the trader’s position. In contrast, options traders can still benefit from leverage when buying contracts, even if the price is fixed.
This scenario happens because of two factors: First, options can be acquired for a fraction of the value of underlying assets. Second, any profit from this acquisition is calculated using the underlying market movement.
However, remember that the risks involved when writing options can be much more significant. That’s because potential profit depends on the premium you receive when you sell the option.
Advanced Trading Strategies
Some options strategies allow you to trade on market volatility instead of price direction. CFDs do not give the same level of flexibility — unless you use option CFDs.
One example of such a strategy is straddle. This technique involves simultaneously purchasing a put option and a call option for the underlying asset with the same strike and expiration date.
This strategy can be ideal when dealing with highly volatile investments. Without considerable price swings, the premiums paid on multiple options will likely outweigh any potential profit.
Hedging
Hedging with options involves entering a position — or multiple positions – that can help minimise an existing trade’s risks. You can use options to hedge a current options position, another derivative (like a CFD) trade or an investment.
Disadvantages
Many people consider options to be a more complicated derivative than CFDs. Options trading comes with its unique jargon, regulations, and formulas.
These financial products may also require intense observation and ample time.
Lastly, options come with expiry dates, after which they lose their value. As the expiry date approaches, options prices decline.
Factors in Deciding Between CFD and Options
There are benefits unique to a CFD and an option. So, deciding between the two requires a thorough understanding of various factors, including costs and risks unique to each of these financial instruments.
These factors include your risk tolerance, leverage preference, and trading flexibility.
With Taurex, you can access many educational resources and trading tools. These learning materials include webinars, courses, and ebooks to help you with your CFD and options trading decisions.
Below are three more factors to consider when choosing between options and CFDs.
Your Trading Style
When selecting financial instruments, one primary question is, “What is my preferred trading style?”
Trading approaches often operate on very different principles, which might help you establish a predominant trading style.
Based on your market projections, you can start by determining how long you intend to hold positions.
For example, CFDs can offer high flexibility for your preferred trading style, allowing you to customise trade executions depending on the current price trend.
In contrast, options depend on expiry dates. This factor could result in lower returns since the deadline might force you to exercise (or forego) rights to options under less-than-ideal market conditions.
Market Conditions
Another factor to consider when choosing between derivative contracts is the market condition.
You can calculate your ROIs from CFD trades by getting the difference between opening and closing prices.
Consequently, you would want the expected difference between the two values to be considerably higher than the risk you incurred entering the market.
Unlike options trading, CFD trading does not concern itself with the time required for the underlying asset’s price to move.
As mentioned above, options contracts are constrained by a timeframe. So, with options trading, you need to monitor the price movement and the time the prices might change.
This difference means that CFD traders usually trade when the market trends.
On the other hand, options traders might take advantage of range-bound market conditions.
Trading Opportunities and Potential
As mentioned, CFD traders’ profits directly depend on the underlying asset’s price. With options trading, the calculation for potential returns is more complex.
As shown above, options premiums rely on the contract’s time and intrinsic value.
Trading options may require you to establish an option combination. Each combination involves an options strategy premised upon your interpretation of market conditions and expectations.
Consequently, you can profit from the financial markets by building many options and strategies.
CFD Trading Versus Options Trading: Which Is Best?
Whether options or CFDs suit you depends on what you seek as an investor. For example, CFDs offer a broader set of markets to trade. If variety is important to you, CFDs might suit you better.
Beginners might also like CFD trading compared to options trading due to the former’s transparent pricing. CFDs move one-to-one with the underlying asset, making it less complicated than options.
Familiarity with financial markets and specific trading approaches will likely be enough to trade CFDs. However, you will have to learn more technical details to trade options.
Options might offer higher returns as you don’t have to execute quick trades based on minimal price changes. The added complexity of options might be worth the time and effort if you can make informed predictions regarding market conditions and volatility.
CFDs vs. Options vs. Futures
These financial instruments are regulated differently and have distinct characteristics.
As mentioned previously, CFDs do not require holders to pay a fixed price when they close their contracts. In contrast, options obligate buyers to do so while allowing them to own the physical asset.
Futures also rely on the agreed-upon contract value to pay within a specified timeframe. However, futures contracts obligate the trader to buy or sell a particular asset after some time. Options only give you the right to buy or sell but do not require exercising these rights.
Options and futures trading are also available to retail traders, although they have their own unique features and risks.
CFDs vs. Swaps
Like CFDs, swaps (or equity swaps) are financial derivatives. But unlike CFDs, swap contracts are binding agreements between involved parties to exchange cash flows over a predetermined period.
Swaps are sophisticated instruments that are not usually available to individual investors. In contrast, retail traders and professional investors can trade CFDs.
Another difference between swaps and CFDs is that the latter lets traders hold contracts based on many asset classes. Swaps only depend on a share or share index as an underlying asset.
Start Trading CFDs
By now, you likely feel confident with your knowledge of CFD and recognise the risks CFD trading carries.
You can start trading CFDs by setting up a retail investor account, selecting which market to engage in, and executing your trades depending on market conditions.
When trading CFDs, one of the first things to do is determine the ideal position size based on your risk management strategy.
You can trade CFDs through a trusted broker like Taurex.
- MetaTrader 4: This trading platform is widely known and offers a transparent trading interface and tight spreads across forex, commodities, indices, and metals.
- Copy Trading by Taurex: This soon-to-be-released mobile application integrates MetaTrader 5 and couples trading sessions with exceptional execution and liquidity. You can get the app from Google Play or Apple’s App Store.
- MetaTrader 5: This platform offers all of the core features of MetaTrader 4 plus newly optimised ones that give you a more rounded trading experience.
Taurex also offers a free demo account to help beginners practise their trades before registering for a live account and deciding what trading strategies suit them.
CFDs vs. Options FAQs
- Should I trade CFDs or options?
The answer to this question depends on how much risk you can and are willing to take.
It will help to consider each financial derivative’s primary benefits and drawbacks when choosing between CFDs and options.
As mentioned, CFD trades allow you to profit from market value movements without asset ownership. In contrast, options trading offers the possibility of profit and ownership.
You must perform due diligence and evaluate your risk tolerance to determine which strategy presents the better option.
- Are CFDs safer than options?
Like other instruments, CFDs and options carry particular risks. As a trader, it is up to you to determine the level of risk you can and want to take.
To do so, you must conduct in-depth research to determine which financial instrument is best for you.
Remember, past performance does not guarantee future ROIs (returns on investment). Also, only trade with money you can afford to lose.
- Are CFDs the same as options trading?
As shown above, CFDs and options are leveraged financial derivatives. However, these products are different.
CFDs offer more direct investment in the underlying securities. Meanwhile, options’ potential profit derives from the asset’s and contract’s estimated value.
CFDs and options also differ regarding transaction costs and profit. With CFDs, you pay the spread (the buy and sell price difference) plus additional charges for executing trades.
With options, you pay a premium for a call or a put, depending on your market projection. You can make a nice profit if the price swings in your favour.
Suppose the price stays the same, and you didn’t pay extra for an in-the-money option. In that case, the options contract expires, and you lose your premium.
- Are CFDs options?
No. Unlike options, CFDs have no expiry date, and you do not need to pay a fixed price at the contract close. CFD trading lets you choose from a wide range of markets and use leverage, which reflects the underlying asset.
- Do professional traders use CFDs?
CFD trading is an advanced trading strategy typically taken up by experienced traders.
These pro traders have an established approach to placing orders. Like traditional brokers, CFD brokers give the following order types:
- Limits
- Stops
- Contingent orders, including “one cancels the other” and “if done”
Some brokers provide guaranteed stops for free, but others charge for them or recover their costs in other ways.
Note that CFD trading isn’t exclusive to professionals. Many retail investors also trade CFDs, often marketed as accessible to many traders.
- Why are CFDs illegal in the U.S.?
A CFD is illegal in the U.S. because it is an OTC product, meaning it does not go through regulated exchanges. Also, using leverage allows for more considerable losses, which concerns some regulators.
The U.S. Securities and Exchange Commission has banned the trading of CFDs in the country. However, nonresidents can trade using them with certain restrictions and through regulated brokers.
- Are CFDs riskier than stocks?
CFDs can be riskier than stocks, primarily due to leverage. With leverage trading, you pay only the margin, typically a percentage of the full investment amount (the total value investors pay for owning a share).
However, if your trade does not go your way, your losses could also be magnified, and you may lose more money than you invested.
- What are financial derivatives?
In trading, financial derivatives are financial instruments dependent on a specific commodity or indicator through which risks can be traded in financial markets.
As shown above, a financial derivative’s value depends on the price of the underlying item, such as a stock share or index.
Note that transactions in derivatives are separate transactions rather than extensions of underlying market transactions.
Unlike debt instruments, derivatives do not have pre-arranged (fixed) payments that holders must pay.
People invest in financial derivatives to manage investment risk, hedge funds, market arbitrage, and speculation.
- Can you trade options on CFDs?
Some brokers let you trade CFDs on option prices. Instead of buying and selling a market at a set price, option CFDs allow you to buy and sell based on the movement of option premiums. Daily, weekly, monthly, and quarterly options are usually available for trading with CFDs.
References
1. Retail Investors Statistics https://www.marketplacefairness.org/blog/retail-investors-statistics/
2. A large chunk of the retail investing crowd started during the pandemic, Schwab survey shows https://www.cnbc.com/2021/04/08/a-large-chunk-of-the-retail-investing-crowd-got-their-start-during-the-pandemic-schwab-survey-shows.html
3. Market Quotation https://www.lsd.law/define/market-quotation
4. Contracts for differences https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-267.pdf
