Spread betting and binary options are somewhat similar, which is sometimes causing confusion among traders. Both of these forms of trading involve making predictions on the direction of financial markets (rise or fall) without having to own any stakes of the underlying asset. They also require a broker, have set time frames, and are available across all asset categories, including commodities, stocks, currencies, and indices. Despite their similarities, there are also some fundamental differences, which can be split into four categories.
#1 – Risk
The risk profiles of binary options and spread betting are very different. Binary options have quite a low risk profile, given that the amount you risk losing by entering a trade is equal to the amount invested. In addition, before deciding to enter a binary options trade, you know exactly how much you can earn in profit and how much you risk losing. Under no circumstance could you lose your entire account capital based on one trade.
With spread betting, the risks are much, much higher. You do not know beforehand how much you could potentially earn or lose, and the final amount (regardless of a profit or loss scenario) strictly depends on how much the market moved during your open position. If the market suddenly becomes extremely volatile, your whole account could be at risk.
#2 – Trade costs
With binary options, the trade cost is generally minimal and since many brokers include it in the underlying trade, it is considered negligible. However, spread betting requires traders to pay their broker a spread on the position they are trading. Since this amount depends on how much you invest, you could end up paying a hefty sum.
#3 – Profit potential
Both binary options and spread betting can be quite profitable. However, the later gives traders a single trade option, which is to buy or sell according to the underlying market price. With binary options, traders have access to many more features; aside from asset direction (call or put), traders can also choose to trade a touch or no touch option, for example. Binary options provide more variety and ultimately, more avenues for profits.
#4 – Onset costs
If you are interested in trading binary options, all the capital you need upfront is what the broker requires as a minimum deposit (typically $100 or so). In addition, all you need to start trading is as little as $5. With spread betting, you are required to have a well-funded account given that you will need to cover the margin costs of your spread bets.
Although similar in certain aspects, binary options and spread betting are two, very different forms of investment. Depending on your risk management strategy as well as your capital availability, you will be able to decide which one is best suited to your trading style.