The popularity of trading binary options has grown exponentially over the last 7-9 years. The widespread use of the internet coupled with trading simplicity and profitability have been the reason for upsurge.
A binary option is a financial instrument whose pay-out will depend entirely on the outcome of a yes or no scenario. The scenario refers to whether the price of an asset will rise or fall beyond a predetermined amount, at a specific date. The binary option, unlike other options, does not give the holder the right to buy or sell the underlying asset, nor do they get voting or dividend rights.
Binary Options Trading – Is it regulated?
Binary options are usually traded through online trading platforms. The US has made binary options trading legal and available through DCMs (Designated Contract Markets). These DCMs are subject to oversight by the Securities and Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC).
For a while, the Australian Securities and Investments Commission (ASIC) considered binary options trading as highly unpredictable and its sale to retail investors was banned in 2021. Earlier in June 2017, Israel’s cabinet put a ban on the sale of binary options. Trading binary options using unregulated brokers is not illegal but could significantly increase the risk of losing invested funds.
While the Cypress Securities Exchange Commission (CySEC) was regulating binary options trading in 2012, most countries in the European Union still viewed it as gambling. This is due to the fact that trading binary options does not need extensive knowledge of the stock market. The UK considers binary options trading as fixed odds betting.
Reducing risk to Increase profit
The straightforward manner with which binary options function has made it an extremely popular investment vehicle, even amongst beginners. The outcome of potential gains or losses can be pre-determined and capped.
Selecting a Binary Options Broker
Most importantly, one chooses a broker depending on the investor’s trading style and objectives. Sifting through the hundreds of brokers online will be a time-consuming task. As overwhelming as this may seem, it is nonetheless, quite important. This is to ensure that the investor finds the features and services required for his investment.
Regulatory Requirements
Regulation refers to the imposition of rules by a government, backed by the use of penalties or fines intended to modify the economic behaviour of individuals or firms.
Regulatory agencies such as FSA, CySEC, and ASIC oversee the trading activities of brokers while protecting the investors’ funds. Engaging with unregulated brokers may put your capital at risk, with no form of reprieve for the investor. A regulated broker will offer a reasonable price and also avoid market manipulation.
While researching for a broker, it is wise to check online for reviews of a particular broker. This will give you a clear indication of the broker’s service, legitimacy in terms of regulation and quality of services offered.
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Payout Percentage
This is the main profitability characteristic of a binary option. It is defined as the pre-determined return after executing a successful trade. The type of trading instrument used will determine the payment percentage. The standard payout is usually about 75% – 85%.
Minimum Initial Deposit requirements
For one to start investing with a trading broker, an initial deposit has to be made to activate the account. Some brokers charge as little as $5. For a beginner investor, it is advised to keep the risk at a minimum by investing a small amount. This can then be scaled up as the investor gets acquainted with the system and improves his trading strategies.
Demo Account
This kind of account is offered by trading platforms funded with fake money so as to enable the investor to familiarise themselves with the account setup and market conditions. There is no exposure to market risk.
A lifetime demo account provides the best scenario for a trader as this allows them to test their trading strategies before entering the real market.
Trading Platform
This is where the investor makes all the trades so it is advisable to use one whose features are simple to use. Some brokers offer multiple accounts depending on the trader’s strategies therefore it is important to check what sets them apart.
Deposits and Withdrawals
An investor should verify the broker’s terms and conditions of withdrawing and depositing funds. The choice will be made on a convenient process with shorter time frames especially for withdrawals. These processes differ depending on the jurisdiction so the investor’s location should be considered.
Mitigating Risk
It is important for the trader to be aware of the risks involved while trading binary options. Thorough research is paramount to successful trading. Reading online reviews of the broker considered will help the investor to make an informed decision and avoid fraudulent and unregulated brokers.
