True or false - the pros and cons of binary options
Even though binary options are considered as one of the most high-risk investment tools available (and in some countries is regulated as gambling), the list of advantages to disadvantages for this type of trading are vastly exaggerated on the internet. Online searching reveals many more pros than cons for this product, making the internet quite an imbalanced place to look for information on this topic.
This article aims to inform readers and help them better understand the advantages and disadvantages that need to be considered before opening any kind of trading account.
Advantages of binary options
This issue of advantages and disadvantages was already covered on this site in an introductory article on Binary options 101, where we listed a few advantages that we can't argue with. Here are the most significant of them:
Binary options are truly free from fees across all platforms. There are no hidden fees and even in some countries they are TAX free.
TAX free (for UK traders)
In the vast majority of cases in the UK, HMRC will most likely class this activity as gambling – as a result any profits arising will be income tax and capital gains tax free.
Free demo accounts
Most brokers offer the chance to open a trading demo account with virtual money. This allows new traders to trade risk free binary options based on real-time data. This is a great way to get yourself more familiar with this kind of trading and to get experience or practice your own strategy.
Trade anywhere and anytime
Traders can generally access global markets at any time - or whenever a market is open anywhere in the world.
Always a predetermined risk and reward
Everyone knows exactly how much he or she can lose and how much they can gain before placing a trade.
100% online trading
Binary Options are traded via online platforms so there is no need for any software downloads. There are also mobile apps available.
Disadvantages of binary options
Binary options are gaining in popularity very quickly, primarily because of their simplicity and the chance to achieve seemingly high profits in a very short time. All of this is supported by huge starting bonuses and the opportunity to open a trading account with a very small deposit. But it is not as simple as it looks. Binary options have many disadvantages that you should be aware of before you continue studying or even start to invest:
Trading against the house
Binary options are similar to sports betting where the broker announces bets and either you win or the broker wins. Also, it is good to know that you are betting just on the movement of an underlying assets and that you don’t own anything (neither does the broker). It is simply an agreement between you and the broker. Keep in mind that in the end the house always wins!
Prone to fraud
If you make a decision to trade binary options you should be very careful you do so with a trustworthy broker. This sector is very prone to a fraud and there exist many scam offers and brokers. Be very wary of platforms or individuals trying to tempt you with their ‘100% guaranteed’ offers.
Losses are always higher then rewards
As an advantage many sources state high returns (average return is approx. 75% of your investment). But on the other side of the coin are that losses are always represented as 100% of your investment. Yes, some brokers offer to reduce the losses by some features, but at the same time it’s also reducing a potential reward.
Each region (UK, U.S., Europe etc.) has its own regulations and licenses in regards to customer protection. Trading with an unregulated broker can lead to a higher risk and in general providing services without a licence or regulation is illegal! These unregulated brokers are very prone to be scam operations and you can lose all of your money. However, there are many regulated brokers that you can work with if you decide to trade.
Most brokers, especially new brokers, specialise purely in binary options, and they offer huge starting bonuses. You can even find bonuses over £5,000 or more! Such large bonuses are startling in themselves. The brokers must know what they are doing and why they donate such large amounts. But the main drawback lies within the Terms & Conditions. These bonuses are very often linked to numerous conditions where it isn't so easy to withdraw the money or you have to turn around the money several times in the market before you can access it. The devil is in the detail.
No stop-loss order
Often using the stop loss order in other investment tools ends the trade and stops a growing loss (when a market is going against a trader). This factor is missing here. Instead, binary options are ‘all or nothing’.
Advantage or disadvantage?
If you have already studied binary options, you are probably missing a few benefits in our list that are very frequently mentioned elsewhere on the internet as well. Unfortunately, we found that these often create misunderstandings and in many cases are a deliberate misrepresentation of the truth. That is the why we didn’t include them here in our list.
We have collected the most popular benefits of binary options through the internet that at first glance appear hugely positive but on closer inspection may not be as good as they first appear. Let’s have a look at eight of the most significant points:
Higher return of investment (ROI)
While the ROI in binary options is potentially higher than you can usually expect in other investment tools, the amount of ROI available is ‘fixed’ before you make your investment (you can calculate the exact ROI before you place your trade as it won’t exceed the figure you project). And remember, the reward in binary options is always less than the risk you bear.
Variety of asset types that can be traded
It sounds nice, but assets that can be traded in binary options are just a fraction of what can be really traded on the markets.
Just one pip
This is a very popular ‘advantage’ that brokers use to present binary options on their websites to new traders. In layman’s terms the broker is trying to say that just a small movement of the underlying asset according to your prediction is needed to win a full predetermined payout (approx. 75%). Yes, this is true and it all sounds very good. But every coin has two sides! The exact same small move against you, just one pip, means you lose 100% of your investment!
No liquidity concerns
Yes, that’s absolutely true, but at the same time it lacks any real meaning because at the same time traders never actually own any piece of the asset. In reality one trade is simply a bet between a trader and a house (or broker, if you want). It is the same as if you bet on football match, you don’t own any piece of the football club or anything associated with it and neither does your broker. So talking about liquidity can be considered as an incredibly misleading tactic.
Free education (or strategies, or tips)
Generally, this point is quite true. The entire internet is overflowing with information that is usually free. But, there is a big ‘BUT’! Because binary options are very prone to fraud, you must be very careful what your source of information is and the purpose behind it. Especially, if it is your broker who offers the free information. You have to be sure that there isn't anything wrong! Why? As it was mentioned in the point 4 (No liquidity concerns) you are betting against the broker. That means if you win the broker loses and vice versa. So why would you think they have your interest at heart?
Easy to use and understand
Binary options are really very easy to understand. The whole process from opening a real trading account to topping your account up to making your first trade is very easy and includes just a few intuitive steps. Beginners can get the impression that they have already understood everything, but hurried steps can wreak a lot of irreversible damages or losses.
Low investments and low deposit amounts
This point has the same issue as the previous one. Generally, it is very nice than you can top up your account with just £100 and your deposit could be as little as £10 per trade. But these small amounts open the doors of ‘investing’ to almost everyone - even those who are prone to become dependent on gambling or are in any other way unsuitable for gambling or gambling like activites.
See results in a very short time
Binary option trades are based, by nature, on short term trading where the result of a trade can be known in just a few minutes. This can be very exciting. But on the other hand, predicting a movement of an underlying asset over very short time period such as five minutes or even one minute, is very hard if not almost impossible.
The bottom line
Every investment tool we know has its own advantages and disadvantages. And what is an advantage for one could be a disadvantage for the other one (and vice versa). If you want to be a good trader or investor don’t be just a puppet or part of a larger flock which lets itself be easily influenced and pulled down by the crowd. For the beginner it is crucial you think for yourself and think over things carefully rather than believe blindly what others say.