Binary Options: The Basics

Binary Options: The Basics

 There are several financial markets available to investors, including the stock markets, FX markets and commodities markets. The binary options market is a newcomer to the financial scene but many investors are jumping on the bandwagon. In fact, binary options trading has become the vehicle of choice for investors looking to make a quick buck.

Binary options trading provides traders the opportunity to make more money than they lose. New binary options brokers are popping up daily and are offering features that appeal to both the novice as well as the experienced trader. Binary options trading is a simple system that is easily understood. They have also been referred to as All or Nothing Options, Digital Options, as well Fixed Return Options or FROs.

Binary Options became an accepted form of trading in 2007 in the U.S. by the Options Clearing Committee and was approved in 2008 by the Securities and Exchange Commission. By May 2008, the American Stock Exchange incorporated binary options in the form of European cash or nothing options.

Binary options is a unique financial instrument for the retail trader and has many advantages over other financial markets such as Forex or stocks. Trading Binary Options leaves the trader with only two possible outcomes: He can either win or lose his investment.

What are Binary Options?

The way binary options work is as follows: A trader chooses a stock, commodity, or currency pair and makes a prediction about the direction that instrument will move and when. The expiry date of the binary option can be as early as one hour (often referred to as a 60 minute trade) and should that instrument indeed move in the direction of the trader’s prediction, the trader is “in the money”. This is an indication that this specific trade was profitable. If the chosen asset moves in the opposite direction, the trade is “out of the money.”

What is unique about this style of trading, among many other things, is that you cannot lose more than the original investment. Either you predicted correctly, in which case, you can make up to 100% of the original investment, or you predicted inaccurately, in which case, you can lose the original investment, with the possibility of keeping a minimal percentage, based on each individual broker’s policy. It is interesting to note that binary options and Forex share a common characteristic whereby no instrument is actually being traded and no goods ever cross hands. All the trading is conducted virtually.

 

Binary Options Brokers

Choosing a binary options broker should not be done in a hurry and the selection should be based on word of mouth and proper research. One should look for ease of setting up an account and regulatory approval by reputable authorities. There are several regulatory organizations in the U.S. CySEC regulation is offered to some offshore brokerage companies, especially those with their main domain in Cyprus.

Binary options brokers are constantly competing for clients and make good use of high tech graphics and virtual data techniques in order to make their website stand out from their peers. At the end of the day, however, they are all user-friendly and offer more or less the same features such as unique trading features, highly marketable platforms, professional risk management and first-class customer service. Some sites run smartphone and android applications allowing the trader to be on target every minute of the day and most trading platforms can be accessed without having to be downloaded. Traders can keep up with today’s need for always being tuned in to the markets.

Free demo trading accounts, which allow free trades for several months using virtual money are an essential part of any online brokerage and are very beneficial for introducing new traders to the binary options markets. Practicing in a demo account gives the novice trader a sense of confidence before moving on to trades in the real market.  If the broker does not offer a free demo account, keep searching for one that does. Some brokers offer bonuses; most do not.

Binary options definitely have a lot to offer when it comes to making a quick and easy profit. But with the proliferation of online binary options brokers, it has become much easier for the trader to be taken in by clever scams initiated by shrewd businessmen. Understanding the financial markets, both local and foreign is an essential ingredient in undertaking any financial transaction and holds true for binary options as well. A word to the wise is sufficient.

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