It is human nature to try to make the most of our assets, including our financial assets. Apart from those people who have no ambition and throw away their money, the majority look for ways to increase the amount they have. They look to the future, and try to build enough resources to let them see out their retirement in a financially stable way.
One of the most common ways to try to build up cash reserves is to use existing cash to put into some kind of investment scheme. There are many different investment vehicles available, and one of the most popular ones in recent times has been binary options.
Like all investment schemes, there is an element of risk involved, but one of the reasons binary trading has become so popular is it provides an opportunity to make substantial profits over a relatively short time period.
There was a time when people were quite happy to leave their spare cash in a bank. They felt it was secure there, and that gave them such confidence that they did not worry too much about the poor rates of interest they were receiving.
Today, unless you have a very large sum of money to invest, putting your money in a savings account is like throwing it away, albeit over a long time period. Interest rates on standard savings accounts are now almost always lower than the rate of inflation.
That means that even though the dollar amount in your savings account may be growing year on year, its real value is actually falling. In other words, you can buy less with the amount in your savings account now than you could with the amount you originally invested. In the present financial situation, putting your money in a bank savings account has to be regarded as a bad investment. This is especially the case for long term goals, such as a comfortable retirement.
Why binary options trading is a viable alternative?
As already stated, binary trading provides a way to make decent profits over relatively short time spans. One of the key aspects of this type of trading is that results are known quickly, giving investors the option to take corrective action before large losses are incurred.
Later, we will look at how this type of trading compares to other forms of investment. First, it is important for the potential trader to understand what this type of trading involves, and how it is different from other more standard types of investing. The best way to do this is to compare this type of trading with stock market investments.
To make our explanation clearer, we are going to create a fictitious company called Ace Products Inc. whose stocks are traded on the NASDAQ. The company is doing well, and its share price has risen by more than a dollar in the last year to $7.95 today.
Stocks or shares are issued by companies that have floated on one or more of the world’s stock exchanges, such as the NASDAQ or the London Stock Exchange. Companies issue shares at a given price, and anybody can then buy some of these shares. Shares are bought and sold through the stock exchanges. The price of shares is dictated by supply and demand. The more demand for a given the share, the higher the price will be.
When you buy shares in a company, you become a part owner in that company, no matter how small your share allocation is. That means you have a say, albeit a tiny one, in how the business is run.
Shareholders are entitled to vote at the company’s AGM, where they can take part in votes to appoint people to the board, and to approve the company’s annual accounts. Most people who have small shareholdings do not bother to attend the AGM to do this. They can appoint a proxy to vote on their behalf. If they do not attend and do not appoint a proxy, they assign the right to vote on their behalf to one of the board members.
If the company they have invested in makes a profit, the board may decide to issue a dividend. The company decides it has a surplus of cash that will be divided amongst the shareholders. Each share will have some monetary value, and the total payable to a shareholder is the share dividend value multiplied by the total number of shares he or she owns. When the dividend is paid out, most companies permit shareholders to reinvest the money by purchasing new shares, or they can opt to receive a cash amount.
For the purposes of our illustration, we will assume you own 1,000 shares in Ace Products Inc., which you bought 6 months ago at $7.25 each. The company has announced that it will pay a dividend of 2c per share. That means you are entitled to a $20 payout from the company. For simplicity’s sake, we will ignore brokerage fees and bid/offer spread (of which more later), but if you decide to sell the shares, you can now make a profit in your investment. Here’s how:
Sale price: 1,000 x 7.95 = 7,950
Gross worth: 7,970
Amount invested: 1,000 x 7.25 = 7,250
Gross profit: 720
The key factors here are:
1. As a part owner of the company you got a dividend of $20 from profit distribution.
2. When the company is doing well, the price of shares tends to rise.
3. If the company did not do well, there almost certainly would have been no dividend, and the price of shares is likely to have fallen.
4. If the price of shares falls below the price at which you bought, your holding will be worth less than what you paid for it. You will have just two choices. You either sell at a loss, or hold on to your shares in the hope that the share price will go up again.
5. When you bought your shares, you did so because you expected the share price to rise.
6. You own your shares, and you can hold on to them for as long as you like.
Binary options trading
The term “binary options” harks back to the early days of this type of trading, when there were only two possible outcomes. You either made a profit or make a loss – there was no other scenario. Today, there are many more complex ways in which you can take part in this type of trading, but beginners should stick to the most basic.
Binary trades always have an underlying asset. This could be a stock, a currency, a commodity, a stock market index, and so on. We will use Ace Products Inc. as our underlying asset.
A key element of this type of trading is that you must specify an expiry time in the future. This could be just a few minutes, an hour, a month etc. Another key element is the strike price. When you make a trade, you take a position that says the strike price will be at or above a certain level at some time in the future.
If you think that Ace Products Inc.’s share price will have risen to $8 in 30 days’ time, you can make a call option. You back your belief with an investment amount. On the trading platform, another trader will have the opinion that your prediction is wrong. He or she will make an offer that will be a percentage of your investment amount.
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