Trading on the UK forex market allows investors to take advantage of price movements in currency pairs. But what’s the best way to trade forex? There are several options available to you when it comes to investing. Two of the most popular choices among investors in the UK are listed options and CFDs. But what exactly are these instruments? And what are the key differences between them? To help you decide, we’ve compared listed options and CFDs, looking at their key features, benefits, and drawbacks.
What are the listed options?
Listed options are derivatives that give the holder the right but not the obligation to buy or sell an underlying asset at a specified price on or before a specific date. Listed options are traded on exchanges, and their prices are determined by supply and demand. You can try trading them yourself through here.
Options can be used to speculate on the future direction of an asset’s price or to hedge against downside risk. If you think the price of a currency pair will fall, you could buy a put option that would give you the right to sell the currency pair at a specific price, even if its market value has fallen.
What are CFDs?
CFDs are also derivatives that allow investors to speculate on the future direction of an asset’s price. However, unlike options, CFDs do not have an expiry date and can be held for as long as the investor wants.
CFDs are traded over-the-counter (OTC), meaning they are not traded on exchanges. Instead, prices are set by banks or other financial institutions that act as market makers. When you trade a CFD, you effectively contract with the market maker to buy or sell the underlying asset at a specific price.
Traders can use CFDs to speculate on rising or falling markets. For example, if you think a currency pair’s price will rise, you could buy a CFD, which would give you the right to buy the currency pair at a specific price and then sell it at a higher price, pocketing the difference.
Critical differences between listed options and CFDs
Now that we’ve looked at the critical features of listed options and CFDs, let’s compare their fundamental differences.
Listed options are traded on exchanges, while CFDs are traded on OTC, which means that prices for listed options are determined by supply and demand, while banks or financial institutions price CFDs.
Listed options have an expiry date, while CFDs do not, which means that once the expiry date for a listed option has passed, the contract is void and can no longer be traded. However, you can hold a CFD for as long as you want.
Listed options are often used to hedge against downside risk, while CFDs are generally used to speculate on rising or falling markets.
Listed options prices are more transparent than those of CFDs. All traders have access to the same information and prices on an exchange. With OTC instruments like CFDs, there is no such transparency, making it hard to get a fair price when you trade CFDs.
Finally, another critical difference between listed options and CFDs is how you settle your trade. When you buy or sell a UK-listed option, you will be assigned the underlying asset at the strike price, or your contract will expire worthlessly. With a CFD, you pay or receive the difference in the price of the underlying asset from when you opened your position to when you closed it.
The bottom line
CFDs are complex instruments with a high risk of losing money due to leverage. Between 74-89% of retail investor accounts in the UK lose money when trading CFDs. Consider whether you can afford to take the high risk before trading. Trading listed options may not be suitable for everyone, so please ensure that you fully understand the risks involved before starting. If you have any doubts about trading listed options in the UK, it is advisable to seek independent financial advice from a broker before starting.