The line between investing and gambling is not always black and white. When it comes to trading in binary options, the line is quite blurry, to say the least.
What is sure though, is that it’s big business.
TechFinancials, a binary options platform that’s listed on the London Stock Exchange, reported a 34% year-on-year increase during 2016. At the same time, Google reported that searches for “Binary Options” doubled in the last three years.
So what’s it all about and should you consider it as a worthwhile investment option?
What is binary trading?
With binary trading, you bet on whether the price of an asset will rise or fall during a set period of time. As the name suggests, there are only two possible outcomes: you either win or lose all your money.
You have the option to choose between various asset classes, including gold, oil and stocks. The trade period is also very short, usually between five and ten minutes, but can be as short as 60 seconds.
Two aspects would point to this practise leaning more towards gambling than investing.
Unlike traditional investing, you don’t actually buy or sell the assets. The process involves trying to predict whether the price of the asset will rise or fall in the set time period, similar to betting on your favourite sports team either winning or losing a game.
In addition, the industry is not currently regulated by the FCA but many of the platforms are regulated by the UK’s Gambling Commission (only if the operator has remote gambling equipment located in Great Britain).
What are the risks involved?
Although it is impossible to remove all of the risk from any investment, binary options carry a particularly high risk. The short term nature of the trade means the price of the underlying asset is very volatile.
And unlike investing in the stock market for example, where you might be down a percentage one day and up a percentage the next, with binary options, you lose your entire investment if your prediction is wrong.
The risk/reward ratio is also skewed in favour of the trading platforms. Most of them will have a capped profit margin of around 60% to 70%.
Say you put £1,000 on the price of gold going up in the next 5 minutes. If your prediction is wrong, you lose the entire £1,000, but if you are right, you profit a maximum of £600 to £700. So although you stand to gain a lot, you can lose a lot more in a short space of time.
Are binary options trading a scam?
With a huge number of platforms to choose from and limited regulation, there’s bound to be scammers within the industry, promising unrealistic returns or never paying out any of your winnings.
However, the process itself is not a scam. Despite the industry’s shady reputation, the majority of binary trading platforms are legit businesses.
Brokers attract new traders by promising huge amounts of profit with very little effort, all within a short time period. In theory, this is possible. But in reality, it creates an unrealistic expectation with users.
New traders expect a quick solution to their financial needs.
There are cases where individuals have won life changing amounts of money and most of the time this is what these platforms will use in their advertising campaigns. But this is the exception, not the rule. The unfortunate truth is that most of the time you will lose your money. However, they will never tell you that.
There are many variables you have to take into consideration to accurately predict price movements. Economic and political developments, time of year, market KPI’s and recent events can all have an impact on the price of the different commodities.
To actually win with binary options, you need to make informed decisions. The only way you can do this is by putting in the time and effort to study and understand the markets.
This is also the reason why most people lose. They don’t put in the effort to understand the markets, going instead for that risky, short-term win.
Whichever way you class binary trading, it’s an extremely high-risk option that’s not justified by the potential rate of return.
If done correctly, its very time intensive, requiring a lot of commitment and dedication to see any form of consistent profit. In most cases though, it all depends on luck, and luck is not a good basis for a solid investment strategy.
Have you any experiencer with binary trading? Any tales to share?