CFD trading basically means Contract for Difference trading which is an agreement between two individuals to exchange the difference between the opening and closing price of a contract. These are derivatives products, so you can trade on live market price movements without ever owning the underlying asset on which the contract is based.
Regardless of whether the underlying markets are rising or falling, you can use CFDs to speculate on future market prices. For example, you can sell (go short) and profit from falling prices if you this the market value is going to fall.
You can also hedge your portfolio to offset any potential losses that can be incurred on the value of your investments.
CFD trading and binary options trading have a lot of similarities, but there are also some major differences. For example, they both allow you to trade on a wide range of markets with a small sum of money.
Like binary options, you can also trade 24 hours a day as you have access to global markets. But the major difference between the two comes down to the differences in the levels of risk to reward associated with an underlying asset.
With binary options, the trader knows exactly how profit can be made or how much loss can be incurred with each contract. So you can make an informed decision before actually purchasing the contract.
In contrast, the profit or loss on the Contract for Difference is unknown and can be closed out at any time. As a result, you can quickly minimize loss or lock in profit. There is a potential for higher reward with higher risk, but there’s also the potential for equally significant losses.
Both CFD trading and binary options offer a low-cost entry to trade on a wide range of assets, but the leveraged nature of CFDs create greater risks for the trader. So if you want to know the risks up front, it’s best to trade on binary options.
You have the option of going long (or buying) if you believe the market prices will rise. If you think the market prices are going to drop, you can sell (or go short). So if you decide to sell, your profits will rise as the market value drops. But if the market moves against your prediction, you will incur significant losses.
If you think that your existing portfolio will lose value, you can short sell to offset your losses. It’s an ideal tactic for investors to use in volatile markets. Further, CFDs are a great way to offset your capital gains taxes if you incur losses.