Many people partake in investing into stocks and shares and use them as a part of their overall investment portfolio. Not everyone knows though that there are a number of alternatives to stock trading that can be used that might be better suited to the individual.
There are a wide variety of derivative instruments that are highly popular around the world. A financial derivative is a tradable instrument that allows people to speculate on the price movement of an underlying asset. When someone trades using a derivative, they never actually take ownership of the asset – they are essentially betting on its price going up or down in value.
Although there are many different derivative instruments available to investors, there are three that are particularly popular:
Contracts For Differences
A Contract For Difference (or CFD) is an agreement that an investor will make with a broker that states that they will settle the difference between the opening and closing prices of a financial instrument at a predetermined point in the future.
If the market goes in your favor then the broker will be liable to pay you the difference while the opposite will be true if the contract goes against you. CFDs are fundamentally very similar to spread betting, hence the reason why so many spread betting companies offer them. For more information check out this guide to trading CFDs.
Vanilla options are the traditional type of option (a completely different entity to binaries). When you purchase a vanilla option, you are buying the right, but not the obligation to purchase a set number of shares within a company for a pre-agreed price within a particular time scale.
The price you pay for the option will include a premium that the broker will charge for the privilege and the main benefit is that you are able to make unlimited profits while limiting and cost to the premium you pay at the beginning. Even if the company was to go into liquidation, you would still only lost the premium.
Binary options are by far and away the simplest derivative instrument that is available on the market. When you buy an option you are simply deciding on how much you want to risk, which way you think the market will turn and the timescale you want to trade over. It is possible to purchase binary options that expire within a minute, hour, day, week or month.
When you purchase a binary option, the broker will let you know exactly how much money you will receive back if you correctly forecast the direction of the price. You will also know precisely how much money you stand to lose if the market goes against you. This is one of the things that makes binaries so popular – the fact that people are aware of exactly what they are risking and stand to gain from the offset.