Binary options is a potential trading instrument that you can profit from quite easily. For some, binary options trading is less complicated, making it ideal for beginner traders. Some prefer the simplicity of trading with them despite the risk of dealing with bogus brokers.
What are binary options?
Binary options are a kind of derivative that you can trade on any market or instrument. As a derivative, its value comes from an underlying market or an asset you do not own. Underlying markets may include major Indices like S&P 500, Dow Jones and NASDAQ, major Commodities such as Silver, Gold, crude oil, and major Currencies like USD/JPY, EUR/USD, and GBP/USD.
The term ‘binary’ implies that you end up with one of two payoffs with this financial option: a fixed amount or zero. There is no other possible settlement that you may have as its premise is simply a yes or no proposition: will the underlying asset exceed a specific price at a certain point in time?
While there is still uncertainty on what price the asset will close, there is always only one outcome to look forward to. Binary options may expire hourly or daily, so you don’t need to wait long to see how your trades went.
How do binary options work?
Trading binary options can be easily understood: you merely decide if an underlying market or asset is below or above a fixed price by a specific time. Information and trends on your underlying can help you make the right prediction, so your understanding and knowledge on the underlying market will come in handy.
For example, you think that Gold will close at a price of more than $1,500 at the end of the day. You can then place a binary options trade based on that assumption. A binary options trade is typically priced within the range of $0 to $100, so you can initially decide how much to risk.
Let’s assume that the binary options trade you chose is set at $30. Your broker will take $30 from your account to place your trade. Let’s say that Gold closes above $1,500 at the end of the day. You will receive $100 for this favourable result. Since you started at $30, the trade will give you $70 as profit. However, if Gold closes at a price lower than $1,500, you will get nothing. And since $30 was taken by your broker to place the trade, you will incur a loss of $30.
Are binary options legit and safe?
If you’re wondering whether you can make money from binary options or not, here’s a quick answer: you can. A reputable broker is necessary to earn from binary options trading. It is imperative to deal only with legitimate brokers as scams and bogus brokers are quite rampant with this trade. There are three questions that you also need to answer:
- Is the market likely to rise or fall in terms of price?
- Will it close below or above a specific level?
- What’s the maximum price you can afford to bet?
The legitimacy of binary options trading relies heavily on the kind of brokers that enter the game. This is why brokers and exchanges that facilitate trading are highly regulated. Binary options are legal. It’s just that finding a trustworthy and reliable broker in a sea of fraudulent firms can be quite daunting. Since binary options are not leveraged, you may consider them safe for trading. The amount that you will possibly lose is never more than your account funds.
Let’s have another example to illustrate this idea: assume that you have $600 in your Forex trading account and you’re ready to risk $60 on a single trade. Your broker will reserve $60 from your funds automatically as you place your order. Let’s say the order has been filled. The $60 will be deducted from your account, so your balance becomes $540. If you guessed it right, your broker would give $100 to you as the markets close. Your account balance will become $640, which means you made $40 from trading. This explains why you won’t lose money more than your account balance.
While binary options trading is relatively simpler, the instrument is highly regulated and scams can still be quite rampant. It also doesn’t have the flexibility in pricing and profit potential that Forex trading offers.
With Forex trading, you can even create a free demo account to help you test the waters without the fear of losing your investment. But in the end, it’s you who decides where you want to put your bets on.