Difference Between Binary Bets and CFDs
Binary betting and contracts for difference are similarly leveraged products, and are often offered by the same brokers as part of their online service offering. Beyond that they differ starkly in the options they open up for traders. Contracts for difference present the ability to speculate on asset prices over the longer term with uncapped, leveraged transactions, while binary betting is more restricted in terms of the winnings it can deliver but is also more suited to shorter-term trading.
One of the key advantages of binaries over contracts for difference lies in their tax treatment. Contracts for difference, while exempt from Stamp Duty which might otherwise be payable in directly acquiring underlying assets, are still liability to Capital Gains Tax on their disposal. Binary bets, on the other hand, are taxed as a gambling product rather than an investment product, which allows traders to save around 20% on the tax costs of their transaction – a considerable saving in the world of trading, where every pound, and every PIP really counts.
Another distinction lies in the nature of the leverage each affords to the trader. Binary betting is leveraged by construction, in that a one percentage favourable move in the market can lead to multiple times your stake in return, whereas CFDs are leveraged on a financed basis – i.e., the leverage is derived foremostly from the broker, which in turn yields an interest cost which must be borne by any trading profits. This can eat into the profit portion of a transaction, and can at times be the difference between a trading profit and a trading loss.
That said, CFDs do also have a number of advantages over binaries, namely the scope for uncapped upside gains with less of an upfront risk. Because binaries present a stable and fixed earnings opportunity, they are naturally less potentially lucrative than CFDs, but this is also balanced with the limit on losses present in binaries, and deciding between the two types of trading is very much a case of weighing up the pros and cons in light of the given trading scenario.
Nevertheless, both binaries and CFDs provide traders with useful features which, when combined as part of a wider trading portfolio, give the trader a significant degree of flexibility and an unparalleled ability to capitalize on trading opportunities as they present.