Nowadays, investors can choose from a variety of investment types, such as Forex, Binary Options, Stocks, CFDs, Futures and many others. Although there are some similarities between them, they are all different.
In this article, we will look at the main differences between these 5 types of investments, and why investors choose to trade one type over another.
This post was provided by Peter Traychev, of LiteForex
What instruments or assets can be traded?
Forex: you can trade a variety of currency pairs. Forex brokers usually offer all major currency pairs (ex: EUR/USD, GBP/USD, etc.), as well as some minor/exotic currency pairs (ex: USD/HKD, USD/TRY, EUR/GBP, etc.).
Binary Options: you can trade all types of assets, for example: currencies, stocks, indices, and commodities.
Stocks: you can buy shares of a company’s stock. These stocks are listed and traded on a stock exchange, and their price is constantly changing.
CFDs: the instruments you can trade with CFDs are: stocks, indices, ETFs, oil, gold, silver, precious metals, and others.
Futures: you can trade options contracts on commodities and stocks.
How is trading done and is margin allowed?
Forex: since Forex is traded in currency pairs, you are speculating that the value of one currency will increase or decrease compared to another. For example, if you think the price of EUR will increase compared to the USD, you can buy EUR/USD by placing a long position. On the other hand, if you think the price of EUR will decrease, you will sell EUR/USD by placing a short position. After the price has reached the level you want, you need to close your position, thus realizing a profit.
Margin can be used in Forex, and it depends on the broker, sometimes the margin can be up to 0.5% (1:200 leverage) or even higher. In the USA, there are fixed margin requirements.
Binary Options are quite simple to trade compared to Forex. Let’s look at an example of a binary options trade: first you need to select the asset you want to trade, then you need to choose if its price will increase or decrease, then set the time your trade will ‘expire’ or close automatically (for example, 1 hour from now, or at the end of the day), and choose how much money you want to invest. If your prediction is correct you will get the payout rate which is usually from 75% to up to 500%. If your prediction is incorrect you will lose the amount you invested.
Margin is not used in Binary Options.
Stocks: traders can buy or sell stock shares. For example, if you think that the price of a stock is currently undervalued and will increase in the future, you can buy a certain amount of stock. Once the price rises to the point you want, you can close your trade. In some markets selling stocks can be quite restrictive or may not be allowed.
Margin can be used when trading stocks. The initial margin requirement for stocks can be 50%, but there may be restrictions in each country and broker.
CFDs are traded similarly to stocks. You can either buy or sell CFDs. For example, if you think that the price of an Apple share will increase in the future, you can buy several CFDs on Apple shares, and once the price increases to the level you want, you can sell them, and generate a profit. Some Forex Brokers allow you to trade Forex and CFDs from one trading account, which is very convenient because you have access to a variety of markets from one account. However, CFD trading is not allowed in the USA.
Margin is used when trading CFDs, and depends on the broker and the specific asset you want to trade. For example, some brokers may offer up to 10% margin for trading CFDs on shares, and 1% when trading CFDs on gold.
Futures: traders can either buy or sell a futures contract. Once a trade is placed, the trader has to wait for the commodity to expire at a higher price (if it’s a long position) or at a lower price (if it’s a short position) at a future date. It’s also possible for the trader to close out his position before the delivery date.
Marin is used in the futures market, which can be as high as that of the Forex market. In the USA, there are fixed margin requirements.
Initial Capital Requirements:
Forex: the minimum deposit requirement depends on each Forex broker. Some brokers allow you to open an account with only $100, others with $1000.
Binary Options: the minimum deposit requirement also depends on each Binary Options broker. It can be from $100 to $500.
Stocks: you can open an account with a discount stock broker where the minimum deposit requirement can be $500 or $1000 for cash-only accounts. If you want to open an account where margin is allowed, the minimum deposit requirement is higher, around $2000 or more.
CFDs: since CFD trading is offered by Forex brokers, the minimum deposit requirement to open an account and trade CFDs is the same as with Forex.
Futures: traders need a large amount of capital, in order to trade futures. The minimum can be several thousands to open an account ($5000 to $10000 or more).
Investors need to understand each type of investment very well before they begin. Also, they have to evaluate which one fits their requirements and needs the best. For example, how much money can you invest, what is your trading knowledge and how much time can you dedicate to trading, etc. The answers to these questions will help you choose which type of investment is right for you.