Binary options are a type of derivative. When you invest in a derivative, you are investing in a financial instrument that derives its value from an underlying asset. When you buy stocks, for example, you become a shareholder in the company in which you invest. But with derivatives, you simply own an instrument that moves up or down with the asset to which it is tied. Of course, the movements can be inversed, similar to going short, and they can be multiplied, similar to having leverage.
The name “binary” refers to the way this special type of derivative can only yield one of two results. You can either win or lose. If you’re “in the money,” you get a fixed payout. The payout will be somewhere in the region of 70%, but of course this can vary considerably between brokers, asset classes, and the underlying conditions of the market.
In recent years, the number of binary trading brokers and platforms has risen considerably. This has introduced more competition to the market and has led to more people being introduced to this style of trading. But, at the same time, this rise in demand has led to unscrupulous players entering the market. Traders do not have to worry about Traderxp scams, and scams from other established players, but you need to be careful when dealing with lesser-known names.
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With binary options, you can buy a “put” or a “call.” A “put” is used when you are bearish on an asset and expect it to fall over time. A “call” is used when you are bullish on an asset and expect it to rise over time. Importantly, you can control the time over which the trade will take place. Each option comes with an expiration date, and the payout level will reflect the market dynamics expected over the time period in which you wish to trade.
Because of the oversized returns and losses that you can see from binary trading, cost of capital is relatively low, and therefore not greatly factored into decisions among binary traders. When one trade can return 70%, many traders are not overly concerned if the returns are achieved in one hour, one day or one week. But, of course, this is still an important metric to consider. While oversized returns give greater opportunities to gain exposure to the market, always keep in mind that the risks of losses are equally pronounced.