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August 18, 2018 | 11:20 AM
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17.07.2018Why the binary options world is bad for investors

With the Australian Securities and Investments Commission (ASIC) blacklisting some binary options companies, it's clear that there's potential trouble to be found.


Investing can be complicated, and it’s not for the faint of heart. From grasping order execution tools like stop losses and market orders to ensuring an appropriate level of risk exposure, there’s a lot to consider. It stands to reason then, that anything which makes this world a little easier to navigate is a good thing.

But it’s more complex than that. Some financial products are presented as simple, hassle-free investment solutions, but they can actually damage a portfolio. Binary options are a good example. By presenting traders with a choice between one outcome and another in a way that resembles fixed odds gambling, brokers who offer this product may appear to be simplifying the process. But this isn’t necessarily the best investment route to take. With the Australian Securities and Investments Commission (ASIC) blacklisting some binary options companies, it’s clear that there’s potential trouble to be found. 

How they work

Binary options are a strange breed of investment product that have sprung up in recent years. To a less experienced trader, they seem to work like a slightly different version of a typical trading product. When a trader buys a binary option, they are essentially entering into a contract giving them the authority to purchase a potentially valuable financial instrument such as a foreign exchange pair or commodity (or a derivative of these).

The key is that the person buying the instrument has to hold it for a time that both broker and buyer agree upon in advance. This could be a very small amount of time, often as little as ten minutes. This means the trader must quickly predict which way, out of two options, the market will move. If it turns out in their favour by the time the specified duration is up, they’ll get their specified reward. If not, they’ll lose their money.

Unpredictability

The first major issue is that it’s nearly impossible to predict with any degree of certainty how a market will perform in the next ten minutes. Some argue that this is how other investment markets work. And while it is true that the stock market can’t be predicted with certainty, binary options are even harder to predict because of the tiny timeframes involved. Stocks, property and other instruments can often be traded for years at a time, so there’s plenty of market data. With binary options, there’s nowhere near as much information to go on, especially in a period of just a few minutes!

Unbalanced odds

The main problem with binary options is that they’re deliberately designed to work in favour of the broker. Many of these sites offer a small reward if the trader loses, and a large one if they win. For example, if a trader invests $50, they might get $5 back if they lose and profit $30 if they win. In this case, if they invest $5,000 and trade 100 times, they could profit 60 times. On the face of it, this seems like a big win.

But in reality, it’s not actually a profit. Because they’re losing $45 40 times over, they’ll be down $1,800 in total. And at wins of $30 on 60 occasions, they’ll gain $1,800 overall. This means their total profits and losses are exactly the same; they haven’t gained anything. In this scenario, all it would take for an overall loss would be for the broker to pay just a tiny bit less for wins or for the trader to lose one more time.

Binary options might seem like a great choice for traders who are seeking convenience and ease. But they’re far from the best way to go. With the odds stacked against the casual trader and unpredictable outcomes overall, there’s little to be said in favour of these financial instruments.


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