Esma singles out cyprus in warning of cfdforexbinary options products
CySEC the Cyprus financial regulator, where many of the firms are registered, increased the regulations on CFDs by limiting the maximum leverage to The main risk is market risk , as contract for difference trading is designed to pay the difference between the opening price and the closing price of the underlying asset. CFDs are traded on margin, and the leveraging effect of this increases the risk significantly.
It is this very risk that drives the use of CFDs, either to speculate on movements in financial markets or to hedge existing positions in other products. Users typically deposit an amount of money with the CFD provider to cover the margin and can lose much more than this deposit if the market moves against them.
If prices move against open CFD position additional variation margin is required to maintain the margin level. The CFD provider may call upon the party to deposit additional sums to cover this, and in fast moving markets this may be at short notice.
Counterparty risk is associated with the financial stability or solvency of the counterparty to a contract. In the context of CFD contracts, if the counterparty to a contract fails to meet their financial obligations, the CFD may have little or no value regardless of the underlying instrument.
This means that a CFD trader could potentially incur severe losses, even if the underlying instrument moves in the desired direction. OTC CFD providers are required to segregate client funds protecting client balances in event of company default, but cases such as that of MF Global remind us that guarantees can be broken.
Exchange-traded contracts traded through a clearing house are generally believed to have less counterparty risk. Ultimately, the degree of counterparty risk is defined by the credit risk of the counterparty, including the clearing house if applicable. There are a number of different financial instruments that have been used in the past to speculate on financial markets.
These range from trading in physical shares either directly or via margin lending, to using derivatives such as futures, options or covered warrants. A number of brokers have been actively promoting CFDs as alternatives to all of these products. The CFD market most resembles the futures and options market, the major differences being: Professionals prefer futures for indices and interest rate trading over CFDs as they are a mature product and are exchange traded.
The main advantages of CFDs, compared to futures, is that contract sizes are smaller making it more accessible for small trader and pricing is more transparent.
Futures contracts tend to only converge near to the expiry date compared to the price of the underlying instrument which does not occur on the CFD as it never expires and simply mirrors the underlying instrument. Futures are often used by the CFD providers to hedge their own positions and many CFDs are written over futures as futures prices are easily obtainable. The industry practice is for the CFD provider to ' roll ' the CFD position to the next future period when the liquidity starts to dry in the last few days before expiry, thus creating a rolling CFD contract.
Options , like futures, are an established product that are exchange traded, centrally cleared and used by professionals. Options, like futures, can be used to hedge risk or to take on risk to speculate. CFDs are only comparable in the latter case. An important disadvantage is that a CFD cannot be allowed to lapse, unlike an option. This means that the downside risk of a CFD is unlimited, whereas the most that can be lost on an option is the price of the option itself.
In addition, no margin calls are made on options if the market moves against the trader. Compared to CFDs, option pricing is complex and has price decay when nearing expiry while CFDs prices simply mirror the underlying instrument. CFDs cannot be used to reduce risk in the way that options can. Similar to options, covered warrants have become popular in recent years as a way of speculating cheaply on market movements.
CFDs costs tend to be lower for short periods and have a much wider range of underlying products. In markets such as Singapore, some brokers have been heavily promoting CFDs as alternatives to covered warrants, and may have been partially responsible for the decline in volume of covered warrant there. This is the traditional way to trade financial markets, this requires a relationship with a broker in each country, require paying broker fees and commissions and dealing with settlement process for that product.
With the advent of discount brokers, this has become easier and cheaper, but can still be challenging for retail traders particularly if trading in overseas markets. Without leverage this is capital intensive as all positions have to be fully funded. CFDs make it much easier to access global markets for much lower costs and much easier to move in and out of a position quickly. All forms of margin trading involve financing costs, in effect the cost of borrowing the money for the whole position.
Margin lending , also known as margin buying or leveraged equities , have all the same attributes as physical shares discussed earlier, but with the addition of leverage, which means like CFDs, futures, and options much less capital is required, but risks are increased. The main benefits of CFD versus margin lending are that there are more underlying products, the margin rates are lower, and it is easy to go short. Even with the recent bans on short selling, CFD providers who have been able to hedge their book in other ways have allowed clients to continue to short sell those stocks.
Some financial commentators and regulators have expressed concern about the way that CFDs are marketed at new and inexperienced traders by the CFD providers. In particular the way that the potential gains are advertised in a way that may not fully explain the risks involved. For example, the UK FSA rules for CFD providers include that they must assess the suitability of CFDs for each new client based on their experience and must provide a risk warning document to all new clients, based on a general template devised by the FSA.
The Australian financial regulator ASIC on its trader information site suggests that trading CFDs is riskier than gambling on horses or going to a casino. There has also been concern that CFDs are little more than gambling implying that most traders lose money trading CFDs. There has also been some concern that CFD trading lacks transparency as it happens primarily over-the-counter and that there is no standard contract. This has led some to suggest that CFD providers could exploit their clients.
This topic appears regularly on trading forums, in particular when it comes to rules around executing stops, and liquidating positions in margin call. Although the incidence of these types of discussions may be due to traders' psychology where it is hard to internalise a losing trade and instead they try to find external source to blame.
This is also something that the Australian Securities Exchange, promoting their Australian exchange traded CFD and some of the CFD providers, promoting direct market access products, have used to support their particular offering.
They argue that their offering reduces this particular risk in some way. When trading with such brokers, traders effectively go up against "the house", on a playing field entirely controlled by the latter. How do binary options brokers make money? The return rates offered by some binary option brokers are simply too small, so they cannot be overcome through strategy.
What should traders look for in a binary option broker? One should avoid unregulated brokers without any further consideration, regardless of how good a deal they offer. The business model pushed by the broker is an important factor to consider too. In this regard, we have two competing models: The two models are fundamentally different.
Suffice to say though that with the exchange-based model, traders trade against each-other, while with the single market maker one, they trade against the broker. The next most important factor is the return percentage.
The minimum required deposit is yet another important factor. The trading platform and the tools it offers is yet another important aspect to consider. Trades need to be placed instantly, without slippage and the platform should deliver the actual market prices, not its own, tweaked numbers. Various charting solutions, copy traders and technical indicators should also be available in the form of trading tools. Other operational facets to consider are underlying asset-selection, option-type selection, expiry times short as well as long-term options should be available and support.
There's a reason why we didn't mention bonuses. According to the ESMA's latest directives, regulated binary option brokers aren't allowed to offer their traders bonuses which encourage more trading and additional deposits, or promotions based on such bonuses. CFDs, forex and binary options are leveraged products and trading with leverage can result in losing more than your deposit.
Trading CFDs, binary options or forex may not be suitable for you, so make sure you understand all the risks. Our website is free for our visitors, but in order to provide this free service we may be compensated, receive commissions or advertising fees from brokers listed on our website.
For personalized information, you should contact your investment advisor. There are several CFD, forex and binary options trading platforms. It is important to compare well. That's why you'll find information on some selected platforms on our website.
Because of counterparty risk, it is not a bad idea to use a few different brokers. Toggle navigation Click for menu. Advantages of binary options The advantages of binary options are fairly obvious. Trading strategies Given the wide array of binary option types available, the genre as a whole lends itself well to a wide range of trading strategies. Disadvantages The disadvantages are also simple and straightforward.
Compare binary options brokers. Webtrader platform and MT4 From 0.