Have you been tempted to dabble in the stock market but are not quite sure how to go about it, haven’t got lots of money to lose or just don’t want to commit large amounts until you know your way around a little more?
If the answer to any of these questions is ‘yes’, then maybe using binary options is a good place for you to start. They are easier to understand and trade than the traditional stock market. Binary options are sometimes called digital options and are more commonly traded in Europe than in the USA.
A simple explanation of binary options
Your binary option trade will finish on a set date. If at that date the option is ‘in the money’, you will receive a pre-set amount of money whether you are buying or selling. If the option settles ‘out of money’, you receive nothing. This allows you to make a risk assessment before you start.
Like any stock market trading, there are risks and you should never commit to more than you can afford to lose. One big advantage, though, is that unlike traditional stock market trading, you know exactly how much you’re going to receive, regardless of how far the asset price rises or falls.
How to trade binary options
First do a little research and get a feel for the asset you wish to trade and try to predict its anticipated price movement, up or down. This double choice is called ‘call’ or ‘put’, where ‘call’ indicates a price increase, while ‘put’ is a decline.
You don’t need to worry about the scale of the movement, which is one reason trading binary options is easier. All you need to predict is whether your asset price will be higher or lower than the ‘strike’ or target price on a given date. Once you’ve made your decision you’re ready to start.
If you predict correctly your return rate will have been decided by your broker and you will know in advance how much you will receive. Binary options brokers will decide the price of your binary options contract by studying how likely the market feels the event will happen. If a large percentage of the market believes a settlement price is going to be reached then the contract will end up ‘in the money’.
A new binary options broker seems to set up shop every day as the binary options – or “digital options”, or “all-or-nothing options” – business continues to grow.
The Binary Options Broker
All you need is a credit card to set up an account with a binary options broker and you can become a binary options trader on your home computer. Successful trading in binary options over the long term involves understanding trends and developing a strategy that can anticipate good returns. A good binary options broker can help a great deal in that process.
The binary options broker offers investors specific types of financial assets to trade in along with the online vehicle to do so. Some binary options brokers specialize in forex (or foreign exchange) trading, where there are only two answers to the question, “Will this currency go up or down?” Binary options may also involve stocks, commodities or indices.
Other than a trading platform, a binary options broker may offer a number of services, including:
- Educational resources, including a demo account to get acquainted with the process
- Live customer service and trading advice
- Analytical tools such as graphs and statistics
- Customer reviews
- Mobile apps so you can trade anywhere, any time that markets are open
A binary options broker may design their offerings for either high or low volume traders, or a combination of both. There are many comparison websites available that allow financial consumers to choose a binary options broker based on standard features such as:
- Minimum deposit
- Amount of signing bonus
- Payout rate (given as a percentage)
- Demo account for free or after deposit
- Risk free trades
- Free Signals
Regulation of the Binary Options Broker
Binary options trading came onto the financial services scene about a decade ago and left many conservative investors skeptical of what they saw as essentially gambling. There was a kind of Wild West approach and more than one binary options broker was charged with illegal practices. In the US, the SEC went so far as to issue a warning to investors in June 2013 about the possibility of fraud.
British regulatory authorities initially took the same approach and left regulation of binary options to the Gambling Commission. That is reportedly set to change and each binary options broker will be regulated and overseen by the FCA or Financial Conduct Authority; public consultations on the subject end June 18, 2015. Similar regulatory bodies govern the operations of respective binary options brokers throughout Europe. In the US, binary options are registered with the SEC and consumers can check the legitimacy of an offer online.
When it comes to investing money, choosing a reputable binary options broker with a proven track record and the resources you need is crucial to your success.
Things to know about trading binary options
You will need to establish a contract length with your binary options broker, this can range from a year or longer, down to just a few seconds! This gives you great flexibility for making (or losing) money.
Check out the transaction costs your broker hides in each trade, they don’t charge separate commissions or per-trade fees. You need to know how often you have to predict correctly to remain in profit. Unless you’re a real market expert, and if you were you probably wouldn’t be trading binary options, it is difficult to consistently outguess the market.
To remain in profit it’s better to spread your investments widely, which in itself runs a risk of higher transaction costs and lower profits.