When people think of trading, most people think of stocks and options. There is a third option you may not be aware of in the UK – CFDs. CFDs are Contracts For Difference, offering unique benefits over listed options. This article will look at how CFDs work and how they compare to listed options.
What are CFDs, and how do they work compared to listed options in the UK market?
In the UK, CFDs are offered by a small number of online brokerages. They are not listed on any exchange but are traded over-the-counter (OTC). It means that when you trade a CFD, you are trading directly with the broker. Because CFDs are not regulated like other financial instruments, they can be used to speculate on a wide range of markets, including stocks, indices, commodities, and even foreign exchange.
CFDs were initially designed for professional traders and institutions. However, in recent years they have become increasingly popular with retail investors. It is because CFDs offer some key advantages over traditional investments such as stocks and listed options.
What are options?
An options contract gives you the opportunity to buy or sell an asset at a predetermined price in the future. Option contracts contain all the information an investor needs to decide if the option is right for them.
For example, the contract should state what assets are being traded, how long the contract is valid for, and at what price the contract holder has the right to buy or sell. This information can be compared with the cost of the “premium” option to decide if it is worth it.
Such contracts can be invaluable to investors as a means of mitigating risk. As an example… Let’s look at the shares of Alphabet, the parent company of Google.
Let’s think there’s a series of negative rumors going around that Google’s next product launch looks disappointing and uncompetitive after Apple’s latest offering. So an investor who owns Google stock is concerned that the stock price will fall after the product is launched.
By using both, they can protect themselves from this danger. All those who do the work are buying an options contract that is valid from today until the next day of the new product’s release, which entitles them to sell their Google shares in the future at or slightly above the price of the new product. public currency. Because they have “locked in” this opportunity to sell the stock at a reasonable price in the future, they no longer have to worry about a possible drop in the stock’s price.
If that happens, they will now be on their way to making a profit by selling Google stock not at a new low, but at more than what they paid when they bought the options contract.
The benefits of trading CFDs over listed options
There are reasons why CFDs have become so popular with retail investors. Here are some of the key benefits:
Short selling– You can profit from falling and rising prices with CFDs. It is because you can sell CFDs short. It means that if you think the price of a particular asset will fall, you can place a sell order and make money when it does. It is impossible with listed options in the UK, which can only be bought, not sold short.
Trade on margin– When you trade CFDs, you can trade on margin. You only need to put down a small deposit to open a trade. For example, if you wanted to trade £10,000 worth of ABC plc CFDs, you might only need to put down a 5% margin, or £500. It allows you to trade with much more money than you have in your account.
Access to global markets– With CFDs, you can trade various assets, including stocks, indices, commodities, and foreign exchange. It gives you access to a much more comprehensive range of markets than you would have if you only traded listed options in the UK.
The benefits of trading listed options over CFDs
While CFDs offer some critical advantages over listed options, there are also some benefits to trading listed options. These include:
Regulation– The Financial Conduct Authority (FCA) regulates Listed options in the UK, subject to strict rules and regulations designed to protect investors. On the other hand, CFDs are not regulated by the FCA, which means there is less protection for investors if things go wrong.
Exchange-traded– Listed options are traded on exchanges such as the London Stock Exchange (LSE). It means they are more transparent than CFDs, traded OTC.
Limited risk– When you trade listed options, your risk is limited to the amount you invested. It is because listed options have a fixed expiry date and a fixed strike price. On the other hand, CFDs do not have a fixed expiry date or strike price, which means that your losses can theoretically be unlimited.
More choice– When you trade listed options, you have more choices regarding the types of options you can trade. For example, you can trade covered call options, which are not available with CFDs.
Dividends– When you own shares, you are entitled to any dividends the company pays. However, when you trade CFDs, you do not receive dividends, and it is because when you trade CFDs, you are not buying the underlying asset.
How to trade listed options on the UK markets
If you want to trade listed options on the UK markets, click here. All you need to open an account. You will also need to be aware of the different types of options that are available. The most common type of option is the call option.
Once you have opened an account and chosen your broker, you must deposit funds into your account. You will then be able to place orders to buy or sell options. It is important to remember that when you trade listed options, you are entering into a contract with another party, which means that you are obligated to fulfil the terms of the contract.
CFD vs options: which is best?
Both options and CFDs can be used to hedge risks. Because of its simplicity and ease of use, CFDs can be recommended to those new to trading. Options are more suitable for more experienced traders, due to the wide variety of strategies that can be used. The range and variety of strategies that can be created using options is their main strength, but it requires a lot of research on the part of the investor.