What are Binary Options?
Along with forex trading and bitcoins, binary options are one of the financial hot topics of the past few years. With their claims of big profits, binary options have become popular with individual investors looking for a way to get rich quick. But there are two sides to every story, and binary options are no different. As with all types of investment, there is a certain amount of inherent risk that needs to be taken into consideration before you invest in binary options.
How Binary Options Work
Binary options are so named because of the two possible outcomes of the deal. Investors who trade binary options essentially bet on whether an asset will be valued at or above a specific value at a specific time and date. Let’s say you are an investor and you want to make a binary option trade on an asset that is valued at $24.950 at 9:00am. You predict that by 9:05am, the asset will increase in value to at least $24.980. You can buy a call option for your prediction with a predetermined payout if you are correct. For example, if you buy a $100 call option with a $1000 potential payout, and your prediction is correct and the asset is trading at $24.980 or higher at 9:05am, you will earn your $1000 payout and make a net profit of $900. If your prediction is incorrect, however, you will earn no payout and lose the $100 you used to buy the call option. This is why binary options are sometimes known as all or nothing investments.
Are Binary Options a Good Investment?
Because binary options are an all or nothing investment that require predicting an asset’s future value within a very small window of time, they are notoriously difficult to master. It is extremely difficult to predict these micro fluctuations in value, which can swing wildly over the course of an hour or a day, with clear trends only emerging on the daily, weekly or monthly level. For this reason, binary options are a better investment choice for a seasoned investor who is prepared to absorb some losses. A novice investor trading binary options will have a hard time predicting these tiny price variations and will be relying mostly on luck.
How to Trade Binary Options
If you decide to take the plunge and try your hand at binary options, it is highly recommended that you talk to your financial advisor beforehand. They can offer valuable advice to steer you in the right direction, and may be able to refer you to a reputable broker to open your binary options trading account. It is critically important that you find a good broker who is licensed and regulated by the government. Government regulations protect you and your investment money by requiring the broker to place it in a trust account. Unregulated online trading sites and online brokerages do not follow these procedures and are much riskier as a result; in fact, unregulated binary options sites are little more than gambling sites masquerading as investments. And the house usually wins.