Higher returns, lower risks, and a shorter investment period. These are the amazing advantages that both new and experienced investors are raving about when it comes to binary options trading. Although relatively new compared to other trading methods and investment tools, binary options trading has already earned a solid following. Here, we lay down some of the basics about this investment tool and what it has to offer for investors.
The Basics of Binary Options
Before going to its advantages over other derivatives, it’s important to first look at exactly how binary options work. As with all other options, the value of a binary option is based on an underlying asset such as stocks or foreign exchange. Binary options are tied to the performance of the underlying asset, and any gain or loss in binary options trading will depend on whether the value of the underlying asset goes up or down.
But unlike other financial investment tools, in binary options trading, your gain or loss is predetermined and pegged at two specific amounts. In all-or-nothing binary options, for example, you either get the predetermined gain, or you get nothing. If the underlying asset is stock, even the slightest increase in the stock value at the maturity date would already entitle an investor to the predetermined gain. A decrease in the underlying stock’s value at the maturity date, on the other hand, would translate into either a total loss or a predetermined loss, depending on the terms of the option. With this investment tool, there’s no middle ground, only two possible outcomes, hence the term “binary” option.
So why do they say that binary options trading carries less risk than other traditional trading methods? The answer lies in two factors: a shorter maturity period and predetermined profits/losses. From the very start, an investor knows exactly how much he could lose or earn from his investment, so there’s less speculation and less risk. There’s zero chance of losing more than you bargained for, because any possible loss is pegged at a predetermined amount, so an investor can choose the exact option that he’s most comfortable with. So you don’t have to worry about market shocks and upheavals that sometimes cause losses to spiral out of control.
At the same time, an investor can get very high returns in binary options trading within a short period of time. Some contracts for binary options offer returns amounting to 85% of the investment, far higher than many other trading methods, including Spot Forex trading. Maturity periods are also much shorter, often lasting a week or less, so gains are realized much faster than in traditional Forex trading where one has to hold on to the purchased currency and wait until exchange rates have changed significantly for the better.
In sum, we can probably expect binary options trading to gain even more followers and investors in the coming years. With higher, quicker pay-offs and lesser risks involved, it’s set to become the preferred trading method for many investors new and old.