What Are Binary Options and Why They May Not Be Good For You?

By Olga Robert
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    In an attempt to make more profit in less time, we tend to put our money in "exciting" opportunities.

    One is often adviced that one should not invest in something that you do not completely understand. However, binary options are easy to understand (unlike investing in cryptocurrencies) but they are technically not investment instruments.

    What Are Binary Options and Why They May Not Be Good For You?

    What Are Binary Options?

    Firstly, binary options are not like traditional options which are contracts that allow you to buy or sell a financial security or asset at an agreed price and time period.

    Binary options, on the other hand, allow you to trade price fluctuations. It is a trade where you have to guess say, whether XYZ company's stock will go up or down in the next 5 minutes for a chance to gain a decided amount.

    To participate in the trade you put a certain amount, say Rs 100, so if you will get say Rs 500 and if you lose, you lose your initial Rs 100 of investment.

    There can only two answers, hence the name "binary". You don't have to guess the percentage increase or decrease in that stock.

    This is probably the most exciting thing about binary options; its simple and straightforward rules. If your prediction is correct, you should get the said amount that you were promised or you lose it all. This is the "all or nothing" scenario.

    Some brokers may return a certain percentage of your investment back to you. So in the same example, if you lose, you may get Rs 20. The rules are set by your broker.

    Another attractive feature is the online trading platform. These trades are available on mobile and desktop applications, making it very convenient to keep track of or put your money in when you want to.

    You can put your money, not just in individual company stocks (even global markets), but commodities, indexes, derivatives and foreign exchange (basically anything that is publicly traded) based on your choice and the choices provided by your broker.

    Reasons Why You Should Reconsider "Investing" in Binary Options

    • Binary options could easily be called gambling. It is almost like betting your money on the probability of something happening or not happening. No one, even an expert cannot guess how the market will act in time periods as small as 5 minutes (unless some announcement was due to be made). Do not be fooled by tags like "exciting investment option".
    • These are offered by individual brokers. They are not sold on exchanges. This means they are not backed by any regulatory body. SEBI (Securities and Exchange Board of India) does not recognize it. There are too many scams out there. It will be very difficult to report a case against them if you are cheated. In short, Binary options are not allowed in India. 
    • Binary options allow you to put small amounts of money, making it attractive for small investors. Even if you invest very little money in it on a daily basis, soon, before you know it, binary options will become an addiction, just like poker or gambling. Things will go out of your hand in no time and money management will seem impossible.
    • Unlike regular options, you cannot sell it before maturity period (5 minutes in the example above).
    • In the common type of binary options, the risk is greater than reward. If you win, you will get the money you invested and more but if you lose, you lose it all.
    • Statistically, based on the law of probability, you only stand a 50% chance of winning. Someone like a professional trader cannot win consistently. You may end up making very little profit compared to the time and money you will end up investing in it if you bet quite often.

    Read more about: binary options
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