It is often quite difficult to fully grasp the concept of what options and CFDs are, especially since there is a certain amount of terminology that you can only learn through experience. Putting it simply, both options and CFDs are ways to speculate on financial markets for a relatively low price. While an option lets you speculate by predicting whether a share value will rise or fall within a specified period, a contract for difference (CFD) essentially does the same but with stocks from all over the world, not just those listed in your country.
You can trade options and CFDs through Saxo Bank.
Speculative
Both options and CFDs are primarily used for speculative purposes. However, since an option is relatively expensive due to time constraints, they tend to be more suitable for short-term trading over less than a month. A CFD, on the other hand, can be traded at any moment so long as you have money in your account. It is also available for use with all kinds of assets from all over the world, so you can choose what you want to trade.
Highly Volatile
If there’s one thing that both options and CFDs have in common, it’s that they’re very volatile investments with fluctuating values that can either make or break your portfolio. These investments are risky and should only be used if you’re prepared to lose some or all of your initial investment.
Low Startup Capital Requirement
One great thing about both options and CFDs is that the minimum required capital for a transaction is usually very low. It means anyone can dabble in speculation as long as they have some extra money on hand. It’s not uncommon for people to invest as little as $10 into either of these markets.
Short Expiration Dates
Another similarity between the two is their short expiration periods which typically range from a few hours to less than a year, depending on what type of instruments you’re trading with and the market’s activity at that given time.
Absence of Additional Taxes or Costs
Whether you’re experienced or a newbie, one thing that will definitely appeal to you about both options and CFDs is that they’re free from extra taxes and commission costs. This means the price at which you buy an asset will also be the price you sell it. In other words, there won’t be any additional hidden charges as long as you go through the official channels to make your transactions.
No Extra Requirements on your Part
Another commonality is they don’t come with any additional requirements on your part aside from opening a trading account, depositing money and buying an option or CFD. For example, aside from the minimal amount you’ll need to start trading, there’s no need for any advanced certification or qualifications.
High Price Co-relation
Both options and CFDs share high price co-relation, which means they’re likely to rise and fall simultaneously and mirror each other’s movements. This makes it much easier to predict their values when used correctly (which is why many experienced traders prefer using these instruments).
Profitability boosts with Volume Trading
One more thing that will appeal to seasoned investors who like trading both options and CFDs is that profit can be improved by trading in high volume. It means that when you practice good money management and trade often, the value of your portfolio will grow faster than it would if you were to trade in small quantities.
Both Require Technical Knowledge and Experience
The last thing both options and CFDs have in common is the technical knowledge and experience required to use them. Since these instruments tend to lose their value quickly, it’s crucial that you stay on top of events or else your options/CFDs will cost you dearly if you’re not careful.
Drawbacks in Trading
Now for the drawbacks – since options and CFDs are both highly volatile instruments, they tend to lose their value quickly, so it’s essential to always stay up-to-date with the latest developments. As such, this type of trading is definitely not suited for everyone due to its inherent risks (unless you’re a skilled trader who knows how to use these instruments properly).
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