The Different Methods of Financial Trading

If you are looking to get involved in trading on the financial markets then you are going to want to weigh up the different methods available to you.  What we are looking at here is known in the industry as financial derivatives (or instruments). 

Although most of the instruments offer essentially the same thing, there are some important differences you should be made aware of. 

This article aims to highlight the main features and differences between:

Options Trading

Spread Betting

CFDs (Contracts For Differences)

Forex Trading Platforms

We will discuss each of these derivatives in turn:

Options trading.  One of the less risky financial trading instruments is options trading.  Although it can be a pretty expensive way to trade, it gives the ability to purchase a set amount of shares while limiting losses.  When you trade options, the broker will give you a price on say a company’s stock.  This price will include a premium that is charged for the benefit of having the option.  If the price goes in your favour, gains are unlimited.  If the price goes against you, even to the point that the company folds, your loss is limited to the amount you paid for the option.

Spread Betting.  Spread betting is mainly a UK phenomenon although it is also popular in a variety of other countries.  Spread betting is banned in the US.  When you bet on a spread you are simply putting a wager on which way you think the market is going to go.  You decide how much you want to bet per point and if the market goes in your favour, for every point it does so, you will win your stake.  If the market goes the other way then you will be liable to pay the value of your stake (per point) for every point it does so.  As with many other financial derivatives, spread betting is based on leverage.  Leverage allows you to place significantly more valuable bets than if it wasn’t an available option.

CFDs.   CFDs (or Contracts For Differences) are financial derivatives with many similarities to spread betting. They are in fact so similar that many spread betting companies offer CFDs too.  When you buy a Contract For Difference you are making an agreement with a broker that you will settle the difference between the opening and closing prices of a financial asset before or at the point of expiry.  Like with spread betting, CFDs are traded on margin (leverage) and allow for massive returns although this can just as easily lead to large losses.

Forex Trading.  Forex trading accounts work in a very similar way to spread betting.  The goal is to simply choose correctly, the direction in which the price of a currency pair is going to go.  You choose a stake and for every point the market goes in your favour, you will stand to win that stake back. If the market goes against you then as with spread betting, your loss will be multiplied by the value of your stake per point.

In conclusion:

There are many available financial derivatives for traders to choose from including CFDs, spread betting, options and even binary options (not discussed here).  Although they perform the same function there are some subtle differences between them.  The best option for you will depend on the markets you are looking to trade, the country you are based in, etc.  Make sure you research the market before signing up with a broker, no matter which instrument you decide to trade as some are far superior to others.