With the constant rise and immense success of online trading, it is imperative for every investor to understand the different investments available in order to make the right investment decision that suits the investor’s personality and is in line with their desired financial goals. In most traditional investments, when an asset is purchased, the investor invests in the monetary value of the asset’s gain or loss, which is determined by the dynamic value of the asset. If at the time of the sale, the value of the asset is greater, the investor obtains a profit; on the contrary, if the value of the asset is lower, the investor loses. Binary options, on the other hand, work differently.
Binary options is the estimation of the intrinsic return of an asset during a certain period of time, which can be an hour or 3 months. They are investments that are made based on whether the current price of an asset will rise or fall at a set expiration time. Binary options are very popular because they offer incredible payouts, an investor can generate up to 75% of the investment on a winning trade, and they are easy to use and understand. It has a fixed payout, taking only two possible outcomes, the investor can make a profit or get nothing, which is why they are also known as all or nothing options.
An example of how binary options work is if Edulin Corp’s stock price is $100 and I buy an option for $100 with a 75% binary payout, which expires in 14 days. At expiration, if the stock price rises to $103, I earn $75 on top of my original investment of $100. If the price falls below $100, I lose my initial investment of $100. However, if the price does not change, I could recover my original investment.
Like most investments, an investor can purchase binary options from a broker. Investors do not pay any fees or commissions for trading binary options, but brokers make their money from the percentage discrepancy between the payout for winning and the amount collected for losing trades. Binary options are also listed on some options exchanges and are very popular in Europe. In Europe, they are traded on EUREX, while in the United States, exchanges like the Chicago Board Options Exchange also trade binary options. Trading on the Exchange offers greater protection, there is transparency as the trader can see the results on the screen.
Like other forms of investment, binary options have risks, and every investor must understand the risks and rewards when trading, they require a sense of direction of the underlying asset’s price movements. Trading strategies such as fundamental analysis and technical analysis can be used to increase the accuracy of price movements.
Trading can be a rewarding investment, if the investor understands the risks and rewards and works with a broker that is a good fit for the individual and has the investor’s best interests in mind.