optionfinance No Comments

Difference between Security and Utility ICO Coins

Initial coin offerings (ICOs) or token generation events (TGEs) are revolutionizing the nature of early seed fundraising.

They have the potential to change the mainstream investment ecosystem itself. Startups can use ICOs to raise capital by issuing crypto tokens on a blockchain – especially that of Ethereum – then sell them to investors or contributors.

Tokens are fungible and tradable just like cryptocurrencies. They’re unique as their value is derived from what they represent – such as company equity or access to a service. Their value is not measured in their utility as a currency or store of value. Recently the SEC announced their intention to consider ICOs as a new viable way to raise funds. This highlights the need for a new regulation. There are two common types ICO coins – equity (security) tokens and utility tokens.

Tokenised Securities

Tokens represent shares of a business. According to the SEC announcement, any token that cannot pass the Howey test is considered a security under the 1934 Security Exchange Act. The Howey test considers the following:

  • Is it an investment of money or assets?
  • Is the investment of assets or money in a common enterprise?
  • Do you expect to make profits from the investment?
  • Does the efforts of a promoter or third party help generate profits?

The final factor of the Howey Test considers any profit generated outside the investor’s control to be a security. This is where confusion crops up as it makes any utility token a potential security as they can be traded on a third party platform.

Equity Tokens

Equity tokens are a subcategory of security tokens. They represent ownership of an asset such as debtors or company stock. A startup can forgo a traditional initial public offering (IPO) by employing blockchain technology and smart contracts. Then they can issue shares and voting rights over the blockchain. A lender could even create tokens that represent debt owned by the company, allowing the buying and selling of loans in a high-liquidity environment.

Utility Tokens

Utility tokens often called app coins, or user tokens, allow users future access to a product or service. You can buy utility tokens or units of services sometimes at a discount off the finished product’s sticker price. You can compare these tokens to API keys, used to access the service.

They’re a means to fund projects of shared infrastructure that was impossible to fund previously. To enable the building of such ecosystems, some tokens can be “pre-mined” in addition to being sold in “crowd-sales” during token launches.

Utility tokens are not designed as investments. But people still contribute in their ICOs speculating the value of the tokens will increase as the demand for the company’s product or service increases.

The fluctuation of utility token prices is comparable to those of sporting event tickets. The value of a ticket to a future sporting tournament may increase if a certain team is expected to progress to the knockout stages of the event.

On the other hand, that same ticket may decrease in value if that specific team is knocked out in the early stages of the tournament.

In summary, while both equity and utility token prices can fluctuate, the major difference is that equity tokens entitle the holder to ownership rights. Utility tokens simply function as coupons and do not provide holders with ownership rights in a company’s platform or other assets.

optionfinance No Comments

Islamic Financial Trading

You have some money saved up and you are thinking about investing that money somewhere to make profit off it.

So you start to explore your options and you stumble upon the vast trading options offered by financial markets. Trading in financial markets is a lucrative option because the returns are usually instant and significant.

However, Forex trading and trading in the stock markets is a controversial topic. People are concerned about whether investing and trading in these markets is halal or haram.

There are many rulings about the final verdict and every school of thought rules in the favour or against of it, based on their particular teachings. But the ruling against the trading activities that involves interest is definitely certain.

Is trading in shares and stock market halal?

A popular consensus amongst the scholars from major school of thoughts is that investing in shares per se is not haram. Buying shares of a company means that you own a percentage in that business and you are deemed as a partner of profit and loss, of that percentage.

However, one important thing to note here is that the individual has to make sure that the company he is investing in does not deal in unislamic activities. Riba or making profit in the form of interest is prohibited in Islam. Therefore, trading the stocks of the companies in which interest is integrated in the business models is regarded as haram.

What if a company deals in partially unislamic activities?

For instance, a pharmaceutical company that deals in the trading of alcohol. General ruling for such cases is that if a company deals in only an insignificant fraction of unisalmic activities (let’s say less than 10%) then it is perfectly fine to invest in buying the shares of that company.

It all comes down to common sense and your knowledge of the company’s dealings. Investing in the shares of a company that solely deals in alcoholic beverages is not allowed. On the contrary, a pharmaceutical company that deals with alcohol but not as a final product is allowed.

Is Forex trading halal?

Before dwelling into the discussion of the halal or haram nature of Forex trading it is important to understand what the term implies.

Forex trading means trading in foreign currencies in the foreign exchange market. It is a very lucrative industry that promises significant returns. And apparently there seems nothing wrong with simply trading currencies.

However, to understand the rulings of Islam on the subject, it is imperative to look at the intricacies of the process.

Forex trading is deemed permissible under following conditions:

  • The cost of transaction should be remitted immediately
  • The trading should be instantaneous.
  • Accruing interest on the trade is considered unislamic therefore the transaction should be free of interest

Usually currency trading takes place with the help of a financial institution as an intermediary, usually banks. And banks are involved in usurious interest, which is prohibited in Islam. Therefore, Forex trading under such conditions is not permissible.

Shariah law

If you want to invest in financial markets but are also concerned about following Shariah law, UFX online trading platform is the best trading option available. It provides Islamic accounts for trading Forex and CFDs. UFX is in compliance with the Shariah Law because it is a broker and not a bank. Therefore, this eliminates the chances of ‘usury’ or interest involved activities.

optionfinance No Comments

What does leverage mean for CFDs?

The British FCA (Financial Conduct Authority) stated that many traders do not fully understand the risks of trading contracts for difference (CFDs).

This is one of the easiest ways of speculating on the stock market.

CFDs and other similar financial products allow you to speculate on the future price movement of anything from the FTSE 100 to individual shares or currencies.

Trading with leverage

Leverage means that you only have to deposit a small percentage (margin) of the total value of the investment. The remainder is provided by the broker you are trading with at a specified rate of interest. However, your profits or losses depend on changes in value of the total investment. Leverage magnifies your profit, or loss on a position.

If the total value of your initial trade position is £10,000. The leverage ratio offered by a broker is 100:1. The initial margin for the trade is at 1% of £10,000, therefore you would only need to deposit £100. A market movement of 0.5% against your position, with original value of £10,000, will lead to a 50% (£50) loss against your deposited margin.

Margin close outs

There’s a high chance for your trades being closed at a loss, due to ordinary intra-day market volatility. This is because of high levels of leverage and brokers’ use of automatic margin close out. Trading positions are closed if your available margin falls below a certain level.

Gambling-style promotions

Brokers inform you of bonuses and other freebies. This is too similar to gambling-style promotions. Opportunities to win bonuses through trading or the offer of account opening bonuses or gifts. These promotions can become a distraction for traders. You have to properly assess the level of risk associated with the investment product and trade accordingly.

Receive further information about CFDs

Join Option.Finance Traders’ Club  Receive Trading Tips  Latest Finance information

optionfinance No Comments

What’s the difference between Options and CFDs?

Options and CFDs  have a number of similarities, but there are also a number of differences.

Both financial derivatives suit their own particular purposes. You don’t own the asset but just have a position open based on the asset price. However, there are several notable differences about the way the two products are leveraged.

It’s the actual pricing of the instruments that distances any similarities. While at first look, the two instruments might seem similar.

Factors for comparison.

While contracts for difference are agreements to close out a contract for the profit or loss in the difference between the opening price and closing price of an instrument. Options are simply rights to later purchase shares or commodities at a set price. Options are bought at a fraction of the underlying asset price, and give the trader the right to later acquire the asset if he so chooses. Most often when it’s profitable. The profit portion for the trader comes in later exercising his options when the market for the asset concerned increases. Profit = Selling Price – (Buying Price + Option Price).

Practical differences

The transparency of instrument pricing differs greatly between CFDs and options. CFDs are more accurate tracker of underlying markets than options for many reasons. Options suffer, in the same way as futures. From a decline in their price point as their expiry looms, and indeed it is only logical that this would be the case. The value of the right to buy the shares is, after all, less valuable with less time to exercise that right in your favour before it becomes void. It is often harder to get a feeling if an option represents true value and a fair reflection of the underlying asset market.

CFDs track the underlying market virtually pip for pip. Brokers are required to match corresponding CFD positions with positions of the underlying asset market. As a hedge against risk and a value-added service for traders. This can make it far easier to follow how the pricing is laid out. The exception of certain ‘market makers’, who as brokers have responsibility to set their own spreads and price points, this presents a much more transparent and clear representation of price.

CFDs options

Another advantage of contracts for difference is that they are available to trade in many ways compared to options. This includes indices, exchange rates, bonds, etc. You can trade options on the basis that there is an underlying asset. While you can’t trade options in conjunction with any index or rate. Depending on which bases you are looking to trade this may or may not pose a problem. However, for new traders looking for as much flexibility as possible, contracts for difference provide wide possibilities.

To start trading CFDs or Options

Just submit your details No commitment Get expert advice