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The use of contracts for difference (‘CFD’) spread bets and binary options (‘forbin’) to trade foreign exchange (‘forex’) commodities, and stocks and shares in volatile financial markets

Author

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  • Barnes, Paul

Abstract

This paper examines the popularity of forex and derivatives - contracts for difference (‘CFD’) spread bets and binary options - at a time when the markets are turbulent and speculating by trading is popular. The paper provides theoretical calculations of the probability of success of trading in this way together with empirical evidence. These show that it is not possible for the trader to trade profitably over the medium- to long-term as these markets are efficient and that the broker, who is the counterparty, will win just like a casino or bookie. It is also shown that these markets have become susceptible to scams and fraud but argues such actions are unnecessary for the broker as it will win as long as the trader continues to bet. Finally, it is argued that whilst forex is the most popular asset traded, its price movements are more difficult to predict and are much smaller compared with stocks and shares and commodities, making it even more difficult for traders to trade them successfully.

Suggested Citation

  • Barnes, Paul, 2021. "The use of contracts for difference (‘CFD’) spread bets and binary options (‘forbin’) to trade foreign exchange (‘forex’) commodities, and stocks and shares in volatile financial markets," MPRA Paper 105580, University Library of Munich, Germany, revised 28 Jan 2021.
    • Handle: RePEc:pra:mprapa:105580
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    File URL: https://mpra.ub.uni-muenchen.de/105743/1/MPRA_paper_105580.pdf
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    References listed on IDEAS

    as
    1. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    2. Barnes, Paul, 2018. "Recent developments in investment fraud and scams: Contracts for Difference (‘CFD’) spread betting and binary options and foreign exchange (‘Forex’) sometimes collectively known as ‘forbin’ – the UK e," MPRA Paper 85061, University Library of Munich, Germany.
    3. Paul Barnes, 2010. "Stock market efficiency, insider dealing and market abuse: the UK experience," International Journal of Business Governance and Ethics, Inderscience Enterprises Ltd, vol. 5(1/2), pages 38-50.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Stocks; shares; securities; contracts for difference; CFD; spread betting; binary options; forex; forbin; scam; fraud; boiler room; bucket shop.;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K2 - Law and Economics - - Regulation and Business Law
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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