Binary Options Trading As an Investment Vehicle

It is human nature to make the most of our assets, including financial support. Apart from those who have no ambition and throw away their money, the majority look for ways to increase their amount. They look to the future and try to build enough resources to let them see their retirement in a financially stable manner.

One of the most common ways to build up cash reserves is to use existing cash to put into some investment scheme. Many different investment vehicles are 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. Still, one of the reasons binary trading has become so popular is that it provides an opportunity to make substantial profits over a relatively short period.

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Bad investments

There was a time when people were quite happy to leave their spare cash in a bank. They felt it was secure there, which 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 huge sum of money to invest, putting it in a savings account is like throwing it away, albeit over a long 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 grow yearly, its real value is 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. Putting your money in a bank savings account is a bad investment in the present financial situation. This is especially true for long-term goals, such as a comfortable retirement.

Why binary options trading is a viable alternative?

As stated, binary trading provides a way to make decent profits over relatively short periods. 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 investment forms. First, the potential trader needs to understand what this type of trading involves and how it differs from different, more standard types of investing. The best way to do this is to compare this type of trading with stock market investments.

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To clarify our explanation, we will 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

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 give shares at a given price, and anybody can then buy some of these shares. Shares are bought and sold through the stock exchanges. The cost of shares is dictated by supply and demand. The more need for a given claim, the higher the price.

When you buy shares in a company, you become a part-owner, 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 vote to appoint people to the board and approve the company’s annual accounts. Most people with small shareholdings do not bother attending 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 representative, they assign the right to vote on their behalf to one of the board members.

If the company they invested in makes a profit, they may 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 they own. When the dividend is paid out, most companies permit shareholders to reinvest the money by purchasing new shares or opt to receive a cash amount.

For our illustration, we assume you own 1,000 shares in Ace Products Inc., which you bought six 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

Dividend: 20

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 would almost certainly have been no dividend, and the price of shares is likely to have fallen.

4. If the price of shares falls below what you bought, your holding will be worth less than what you paid. You will have just two choices. You either sell at a loss or hold on to your shares, hoping the share price will increase again.

5. When you bought your shares, you did so because you expected the share price to rise.

6. You own your shares and can hold on to them for as long as you like.

Binary options trading

The term “binary options” refers to the early days of this type of trading, when there were only two possible outcomes. You either made a profit or a loss – there was no other scenario. Today, there are many more complex ways to participate 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 Ace Products Inc.’s share price will have risen to $8 in 30 days, you can make a call option. You back your belief with an investment amount. On the trading platform, another trader will think your prediction is wrong. They will make an offer that will be a percentage of your investment amount.