Investing in stocks has traditionally been done through actual purchase and possession of stocks of a particular company. However, this comes with the risk of having to stick with the stock even when the price is falling and you do not find a ready buyer in the market immediately. In addition, for some other stocks you might need a huge capital outlay in order to purchase them due to their high price per share in the market. To overcome these challenges, you can choose investment strategies that allow you to trade on the stock of your choice without actually having to own it.
Trading on price movements of underlying assets
Derivatives are financial instruments that allow you to trade based on the price movements of the underlying assets without having to own the underlying assets. This gives you the protection from holding onto loss making stocks when there are no willing buyers immediately. You achieve this through the ease of exit provided by derivatives incase the market moves towards the red and you would like to let go the derivative instrument you are holding. Derivatives come in different forms and they range from the very complex financial instruments traded in futures markets by hedge funds to very simple and easy to learn binary options trading and spread betting.
For beginners, binary options trading and spread betting are the easiest to understand and start executing if you are looking for an alternative stock investment strategy. Both binary options and spread betting allow you to trade based on the price movement of the underlying stock or any other asset class that you choose; while actually not owning the underlying asset. The two trading strategies are similar in that they are executed via online trading accounts that are hosted by online trading brokers. To secure your online transactions, you will however need to thoroughly screen different brokers before landing on your preferred online trading platform. In addition, you need to consider the additional trader support offered by different platforms such as the daily market reviews offered by SaxonTrade before making the final choice. After choosing the right online trading platform, you will then need to start learning how to trade via demo accounts before delving into the live account where you invest your real money.
Differences between binary options trading and spread betting
Binary options trading differ from spread betting in a number of ways. For binary options, you make a yes or no decision with regard to the price movement of your chosen stock. If you predict that the price will go up, this is referred to as a call option; while if you predict that the price will drop this is referred to as a put option. Binary options are referred to as fixed risk contracts due to the fact that you only risk a specified amount of money if your prediction for price movement is wrong or out of the money. On the other hand, if the trade goes according to your prediction you are said to be in the money and your payoff is also fixed at certain percentage of your wager.
Spread betting on the other hand primarily differs from binary options trading based on the fact that it has unlimited gains and unlimited loses. In spread betting, you predict whether the price of the underlying stock that you are trading on will rise or fall. Your returns are determined by the difference between the opening price and the closing price of the underlying stock. Unlike binary options where you know your maximum gain or loss before you start trading, in spread betting, your winning or losing chances are unlimited and depend on how far the price movement will be during your trading period. However, you can opt to set a “stop loss” or place a “take profit” level such that you limit your losses and profits and have a bit of control over your risk exposure.
Choosing between binary options trading and spread betting is always a matter of personal preference. Some traders prefer binary options due to their fixed risk and return structure, while shying away from spread betting due to the unlimited risk exposure they possess. However, using stop loss and take profit levels you can be able to mitigate your risk exposure in spread betting while at the same time enjoying the higher margins you stand to gain as compared to binary options trading. Ultimately your risk appetite and desired returns will be a key determinant of which alternative stocks trading strategy you will opt to go with.