There are so many ways to invest on the stock exchange, thanks to a large quantity of derived products. But some of them can be really hard to grasp. A binary option is certainly the easiest financial product to understand, as there are only two possible results: You win or you lose. All you have to do is to make a prediction on what will happen at a precise date and time in the future, in regards to one particular asset. Here is what you need to know about binary option.
Definition of a binary option
When you enter into a binary option transaction, you will have to decide upon two potential outcomes. The other one will be held by the broker that is entering into this contract with you. You will be asked a question that you will have to answer by “yes” or “no.” That is why this financial product is called a binary option. If the person who bought the binary option answered rightly, once the answer comes up, he receives a payout. And if he is wrong, he loses his investment.
Where can you trade binary options?
Binary option transactions are not legal in every country of the world. And so, the first thing you must do is to find out if laws apply where you live that could stop you from acquiring binary options. If that is not the case, then you need to find a broker that deals in binary options, where you will be able to open an account and start trading. There are international traders where it is easier to open an account. See a review of “Pocket Option” here, which is one of them. This way, you will also get a better idea of how to open an account and to invest in binary options.
How does a binary option work?
A binary option is a contract that is made between a broker and his client. It states what the price of an asset sold on the stock exchange will be, at a precise date and time, in the future. When that moment arrives, if the buyer was right, he will earn a profit immediately. But if he is wrong, he will see his investment being removed from his virtual wallet, on the broker’s website.
It is certainly an easy solution when you are thinking of trading on the stock exchange. To a certain degree, you could compare it to playing black or red on the roulette instead of playing poker, which is a much more elaborate game. But then, if you want to be a winner at binary options, you have to do your research well, before choosing which asset you want to trade and analyze deeply the possibility that it can gain or recede in value, during a given period of time. Otherwise, it becomes a simple game of luck, which could be costly in the long term.
Examples of binary option trades
The simplest binary option trade would be to choose if the share of a company will rise or fall, in a given period of time. That period can not be shorter than 30 seconds or longer than 2 months. Someone could say: “I think that Microsoft shares will be higher in two weeks.” This will be stated in the contract between the broker and the client, with a precise expiration date and time. It always takes the form of an answer through “yes” or “no.” And so, in this case, the question would be: “Do you think the Microsoft shares will be worth more on November 1st, at 9:00 am, Sydney time?” If the buyer thinks it will, he will answer yes.
An amount invested will be decided. Let’s say $100 for the purpose of this exercise. The broker will provide, before signature of the contract, the payout percentage it will give, if the buyer is right. If it is 70%, it means that the buyer will be credited $70 on his account if he is right, in the end. However, if he loses, then $100 will be removed from his virtual wallet.
But there are other types of binary options contract available. It is possible to predict the future price of an asset, by declaring that it will find itself between “x” (lowest price) and “y” (highest price). We could say that the price of gold, in one month time, will find itself between $2,000 and $2,100. Again, if the prediction is right, the buyer gains the percentage agreed upon, and if he is wrong, he loses his investment.
How to select the asset in play in binary option trading
There are no guaranteed ways of making sure that you win your binary option trade. However, as we said before, this should not be a game of luck. What you need to do is to look at some shares and other stock exchange assets and analyze their movement, short and mid-term. There are patterns for all of them. Your job is to find it. That is what you will base your decision upon. You will also have to take an account the situation around the world. For example, at the moment, with the war in Ukraine going on, changes can happen rapidly, especially in the field of energy. Therefore, it is best to stay away from this sector, as instability is the one thing you don’t want, when trading binary options.
Also, you best stay away from very short transactions. Anything can happen in a matter of minutes. To enter into a binary option trade, with an expiry date of less than a day, is a risk that is almost impossible to control. The right length of time will be different for each of the assets. According to the way that their price behaved, in the weeks and months prior, you should have an idea of how long the contract should last for. If you don’t find any pattern on a given asset, move on to another, and do so until you find one that you feel comfortable with.