One Two Trade: How Binary Trading Works

| August 28, 2013 | 0 Comments

Binary Stock

Binary trading offers an exciting new way to get involved in the stock market without having to invest a large sum of money. Instead of purchasing high numbers of shares and watching for the right time to buy more or sell some, investors essentially gamble on the direction in which they think the share price will go. Also knows as ‘all or nothing’ options, this type of trading is an exciting and accessible way for novice investor to get involved in the stock market.

Binary trading is becoming increasingly popular around the UK, as investors look to reap the rewards of sometimes up to 500 per cent of their initial investment. However, this type of trading can also present big risks, as with a yes or no outcome there is always the chance of losing everything.

How it works

In order to make money with binary trading, the investor must first find a partner to balance the risk against. Usually this is a broker such as onetwotrade. The investor then chooses a company to invest their capital in, and predicts which direction the share price will move in by the end of a fixed period.

As an example, an investor may choose to invest £100 in a binary option from Samsung. They go to Joe Bloggs broker to buy the option and receive an offer for a percentage pay out if their prediction is right. They predict that Samsung’s share price will increase by the end of the week, and Joe Bloggs offer them an 80 per cent pay out if they are right.

The result will go one of two ways:

  1. The share price rises and the investor receives their investment back plus 80 per cent
  2. The share price falls and the investor receives nothing back

This 0 or 1 outcome is what gives binary trading its name, making it a unique way of trading where there are no grey areas, only a win-or-lose situation.

What are the risks involved?

Binary trading is a great way to get involved in the financial markets without having to know a great deal about the industries. If you know that a new product is due to launch from a certain company, you can make a reasonable prediction that their share prices are going to rise. This means even a novice investor could potentially make a good return on their investment, and often in a short space of time.

The main risk to be aware of is the loss of your investment. With rapid turnaround and aggressive trading going on, it could be possible to lose everything in the space of a few minutes. However, as long as you never invest more than you can afford to lose, you stand to gain a lot more than you would by leaving the money in the bank.

The upside of this is that the potential losses are clearly defined, unlike other situations such as spread betting where you could be liable for large amounts if your predictions are incorrect. With binary trading, all you will ever lose is your initial investment, and if your prediction is correct, even with just 0.1 pip, you could stand to grow that investment by 80 or 90 per cent or more.

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Category: Investment

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