Considering how easy it is to get started with binary options trading, the big payouts, the convenience, and the quick returns, it's not surprising that those unfamiliar with them would assume that it is considered gambling. While binary options trading offers many benefits you would not get from other trading instruments, that doesn't make it easy.
Some people might make some money with good luck, but it requires a good strategy and knowledge to make binary options trading a viable long-term way of earning money. It might be a gamble for those who don't know what they are doing, just as buying shares or property can be a gamble, but trading binary options is an art and a business rather than a gamble.
To help clarify binary options, we will look at them in more detail, discuss how they work, and how you can make the most from this financial instrument.
What Are Binary Options?
Binary options relate to binary outcomes in price movements for a certain asset or instrument. This is different from all other forms of trading where there are multiple outcomes; with binary trading, there are only two possible outcomes.
You will either “win” or “lose.” The outcome is similar to casino games where you either win or lose, but there is a lot you can learn to become a successful trader and minimize the losses.
When people place a trade for a binary option, they are passing their judgment on what a commodities price will be in the future. If you estimate the price movement correctly, you get paid; if you don't, you lose your money or at least a big chunk of it.
This often makes people think of binary trading in terms of gambling because, much like gambling, there is an all-or-nothing outcome.
For instance, if you place a trade for $1,000 in the hopes that a commodities price will rise from $500 to $600 and it only reaches $450, you lose your money. However, a good binary options broker will usually return 5%-20% of your total trade value if your trade amount is above a certain size, so you don't lose 100%. This is just the basic idea of binary options, and a lot more goes on in this business.
In any binary options transaction, there are three main components. These are:
Underlying Asset – This is the commodity on whose price you will place a trade. This could be oil, cement, company shares, forex pairs, or anything else.
Direction – You will be placing a trade for an upward movement or a downward movement in price. Essentially, you are either of the view that the price will go up or down.
Value – Lastly, you will place a trade of a certain size. Usually, the more certain you are about a certain price movement, the bigger the trade because the more money you will be able to make from it.
There are two more important things you should remember regarding binary options.
The first is that with binary trading, the buyer or seller does not necessarily own any of the underlying assets they are trading on. For instance, if you place a call option (right to buy) on crude oil price, you don't own any crude oil. You are simply speculating the price movements of the asset.
Secondly, binary options contracts usually only last a very short period. Some of these can be for seconds, while a long-term contract can last for days or, at maximum, a week. This is very different from other forms of trading in which people hold an asset for weeks, months, or even years, waiting for it to reach the right price.
Two more terms that will help you understand the binary options industry are strike price and expiry price. The strike price is the price of the asset when it is initially purchased, and the expiry price is the price you expect it to reach in the future.
Why Should You Consider Binary Options?
You know a little about what constitutes binary options contracts, but what makes this such an attractive form of investment? There are a few things that are unique to a binary options contract.
Limited Risk – In most other forms of trading, you can use leverage. You are trading with more money than you have in your account.
A binary options broker will not give you this service. Therefore, you can only make profits based on the money you have. Still, more importantly, you can only lose money in your broker account.
Predetermined Consequence – Nearly all binary options platforms offer what is known as Fixed Return Options. With these, the amount that you will be able to earn (or lose) is already predetermined.
Usually, this is 81%, though some brokers might offer 10% of your total trade value. In any case, you will know exactly what you can expect to make.
Fixed Reward – Another benefit is that you are guaranteed a payout as long as the price moves in the direction you predicted. Even if the underlying asset price doesn't reach exactly the price you forecasted, you will get a payout as long as it is in the same direction.
The same applies to a loss. If the price moves even slightly in the opposite direction, you will incur a loss.
Quick Action – Trading shares, real estate, or another asset usually relies on a buy-hold strategy. In binary options trading, you don't have to hold for very long.
Most traders will conduct several daily trades through their binary options brokers, and even if they are making long-term trades, they will not last more than a few days. This quick price movement makes it an excellent choice for those that don't want to get into a long-term commitment.
Two-way Benefits – In most other forms of trading, the aim is to buy low and sell high. In binary options trading, you can profit from the financial markets through both price increases and price decreases.
This feature of binary options trading makes it far more profitable than other options. You aren't selling binary options. You are simply profiting from predicting the right price movements.
Exposure – With other forms of trading, you are fully invested in that asset. If not financially, at least mentally.
With binary options, you get exposure to all kinds of instruments, from commodities to foreign exchange to shares to anything else you would be interested in. This is an excellent strategy for minimizing risk since you can invest in various assets.
This is why binary options are popular, but are they safe for you if you choose to invest, or will it be a case of binary options gambling?
Are They a Binary Options a Safe Investment?
People are often apprehensive about putting their hard-earned money into an online trading platform due to security concerns about the platform and the asset itself. This is a completely normal concern to have.
If you treat binary options like a business, avoiding scam brokers and fraudulent trading platforms, it will be much easier. Several regulators look into brokers' operations and the authenticity of the instruments available through binary options brokers. Their mission is to uphold the end user's security.
Depending on your region, you can look for brokers with appropriate licensing and registration. Similarly, if you want to work with an offshore broker, just make sure it is an authentic platform and that they have all the licensing in place.
Well-reputed brokers often have slightly higher trading fees, and they might not offer access to every single instrument on the market, but at least you will be confident that your money is safe.
If you are in the US, you want to trade through a broker that is affiliated with NADEX, AMEX, or CBOE. If you choose an offshore broker, find one with an ASIC license or any other reputable EU license to cover yourself against fraud and losses.
With a good broker, you will be confident in your buying tool, quick payouts, 24/7 customer service, and a secure framework to trade through.
Going for random brokers that “guarantee” returns or offer unusually low rates will always be extremely risky, and rarely do such things turn out to be good trading decisions.
Binary options are a real way to make great profits, but you need to know what you are doing. Otherwise, it is just as risky as gambling. You can earn excellent returns with the right broker, a good understanding of fundamental and technical analysis, and knowledge about the underlying asset.
Ideally, you should stick to well-reputed names when choosing assets or brokers and start off with a demo account. If you feel like it is something for you then you can go ahead and invest real money to earn real profits.