If you're looking for a new and interesting way to trade, binary options might be something to consider. These easy-to-understand, yes-or-no trades take a lot of the guesswork out of short-lived investments, although they can also resemble gambling in some cases.
Definition
What are binary options?
Binary options are derivatives that allow investors to make all-or-nothing wagers on different events like the changing price of an asset. Unlike stock investments, where you have a range of outcomes, from making your money back multiple times over to losing it completely, binary options only have two outcomes: yes or no.
However, because of the simplicity and temptation for a quick win with binary options, they are also often traded in less than ideal environments, where fraud can be rampant. If you choose to trade binary options, do so with a regulated exchange for the best results, and not with an unregulated offshore platform.
How they work
How binary options work
Binary options are incredibly simple and easy to understand. They're also generally very short-lived, so you'll know quickly if you've won or lost with the option you've selected. In this way, they're more like gambling than investing.
With a binary option, you literally are deciding simple things like if a stock's share price will be above or below a particular threshold at a particular time and date, or if the exchange rate between two currencies will favor one or the other on a given day.
As an example, think about if you're buying a $50 lottery ticket to win $100. If you win, you're up $50 ($100 pot minus the $50 ticket). If you lose, you're out $50.
That's a binary option.
Pros and cons
Pros and cons of binary option trading
Binary options are fraught with danger for traders who are new to them, especially if they don't understand the fraud risk that exists. You can mitigate this risk by using only regulated exchanges to trade binary options, however.
Although a generally cited advantage is that the binary options offer a simple-to-understand, yes-or-no decision, binary options are really more like placing a bet than making an investment.
An investment is when you stake your own money in a company or project that you believe in, depending on if it's a stock or a bond, or some other type of investment. Binary options are literally bets that a thing will or won't happen.
Related investing topics
Why they matter to investors
Why binary options matter to investors
Binary options should not matter much to long-term investors, since they are really not investments in the sense that we understand them here at The Motley Fool. They're neither companies (stocks) nor projects (bonds) that will help grow your investment over time with good management. They're simply a gamble that a thing will or won't happen.
For investors starting out, they could be a solid way to practice forecasting stock prices or giving you simple investing problems to solve, with a little financial incentive tied in. However, this is only useful if you are careful to avoid fraudulent binary options, and don't take your binary trading too seriously.
This is not a long-term investing solution.
