The Differences Between Spread Betting and Binary Options Trading.
Unsure which is right for you spread betting or Binary options?, we break down what they are so you can make an informed decision to which is right for you.
What Is Spread Betting?
Spread Betting, often referred to as a form of financial derivatives trading, is a way of speculating on the price movement of a wide variety of global financial products which include shares, indices, currency pairs, treasuries and commodities.
With this form of trading, unlike traditional forms of trading, you neither buy nor sell the underlying asset. Instead, you place a bet on whether the price of the product is expected to increase or decrease in value. For instance, if a trader expected the value of a commodity to increase, they could bet that the price would increase while if they expected the value of the commodity to decrease, they would bet on it decreasing in value.
An important terminology when talking about spread betting is stake. When a trader spread bets, they either buy or sell a commodity in accordance with the movement of the commodity, for instance, £6 per point. The implication of this is that for every point of the price of the commodity that moves in their favour, the trader gains a multiple of their stake multiplied by the number of points the share price moves in their favour.
Alternatively, they lose multiples of their stake size for each point the share moves against them. Something extremely important to be aware of in spread betting is that losses can exceed the deposits you make.
The spread is another important terminology in spread betting. A spread is a difference in the buying price and the selling price of a commodity. A tight spread implies that the spread you pay is less and the implication is that the cost of trading is lower.
Margin and leverage are important to understanding when choosing to spread bet. Spread betting a financially leveraged commodity means that it is possible to deposit a smaller percentage of the total value of a spread to open a position. The amount is determined by the broker – often called a trade on margin. Leveraged trading enables traders to magnify their returns or losses because the margins are based on the full value of the position of the spread and therefore, it’s possible to lose more than your deposit.
Spread Betting Pros
One might wonder why to engage in spread betting on the financial market. Well, spread betting has a couple of advantages.
• You have the ability to sell or buy a commodity. If you suppose the value of a product will increase over the coming days, you can buy the product. On the other hand, if you think the value of a product will decrease, you can sell the product. Therefore, you can protect yourself from incurring losses.
• You have the ability to trade on a leverage. The implication of this is that you deposit a small percentage of the total value of the trade to ably open your position in the market. Therefore, it is cost effective as often the returns exceed the deposits- that is if you make a good prediction.
• Another benefit is that you can do trade on varied platforms; global share markets, currency pairs, indices and commodities.
Spread Betting Cons
As much as spread betting has a lot of pros, there are also disadvantages involved in this form of trade.
• When trading with leverage, losses will also be magnified.
• Because profits made with spread betting are tax-free in the UK, losses are not tax deductible.
• You do not own the assets that you are betting on thus you do not benefit as much from them.
Which Brokers Offer Spread Betting?
There are many brokers that offer spread betting. We have listed three below, in no particular order.
ETX Capital have a wide choice of platform available that are designed specifically for traders. ETX Capital are one of the longest established spread betting providers in the UK and they provide access to an extensive library of trading resources and tools. ETX offer a large variety of instruments to trade from including currencies, stocks, indices, commodities, options and more.
For more information on ETX Capital, read our full review of ETX here.
Core Spreads were founded in 2014 and offer two platforms (MT4 and CoreTrader) which gives access to a variety of markets. You can learn more about Core Spreads and try a demo account on their website.
With this trading platform, you have access to a variety of markets with competitive prices.
Visit our spread betting comparison page to see a more comprehensive list of spread betting brokers.
What is Binary Options trading?
Binary options refer to a type of contract where the payout is dependent on the result of a proposition entered into. The payout has only two possible outcomes; a fixed monetary amount of a predefined unit of an asset or nothing at all. The binary option contrasts with the other financial options which the payoff has a continuous spectrum.
The main types of a binary option are either the asset or nothing binary option or the cash or nothing binary option. As an option holder, once you acquire a binary option you have no further decision as pertains the outcome of the option because they exercise automatically. In addition, a binary option limits the holder from selling or purchasing an asset. On expiry of a binary option, the holder will receive a predefined amount of money or nothing at all depending on the outcome of the option.
Binary options is a very high-risk form of trading that has earned a relatively bad reputation in recent years due to a high number of scams. It is extremely important to do your research and ensure you know what you are doing.
• Binary options have a high turnover. With the fast-paced environment the potential for losses is high.
• Binary options is a short-term trading strategy as the positions on trades can close within 60 seconds and last up to 30 days.
• Binary options, being new in the trading industry, suffers from the fewer assets to trade in compared to spread betting.