“An investment in knowledge pays the best interest.” – Benjamin Franklin
Are you interested in trading on the global financial markets? Your friends have told you about the relatively new investment vehicle known as binary options; however, after you visited your best friend Google, and read how many people are adamant that binary options trading is akin to gambling, you are a bit nervous about following your friends’ advice. You have also read that binary options trading is a very high-risk activity that you will more than likely fail at; therefore, losing your entire investment.
Are the above statements correct? Is binary options trading similar to gambling? Is it a very high-risk activity, and, finally, will you lose your entire investment if you invest in financial options?
Before we look at the answers to these questions, and, before we determine whether the above statements are true or not, let us look at the definition of what binary options are.
Binary or Financial Options
According to Investopedia.com, a binary option “is [a] type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition… A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.”
In simple terms, when you trade in binary options, you do not purchase shares in an underlying asset. You trade on whether you believe that the share price of this asset will rise or fall within a specified time-frame. It is, thus, easy to conclude that binary options trading is gambling because it sounds as though deciding whether the price of an underlying asset will move up or down is based on luck. However, this is not the case. To determine which way the price of an underlying asset will move is a combination of knowledge, skill, experience.
Things to watch out for when investing in financial options
Avoid fly-by-night brokers
Because of the increased access to the internet, and the growing number of online trading brokers opening up, it’s very easy to choose an unreliable online trading brokerage to partner with. Statistics show that about 50% of the world’s population currently has access to the internet via mobile devices. Therefore, it’s important to ensure that you open an account with a reputable broker. Read reviews written by experienced traders and look at the different brokers’ websites. Some companies pay large sums of money to ensure that their websites are professionally developed, with enough information for you to be able to determine whether they are a reputable firm or not.
Don’t guess, educate yourself
The online trading partner you choose should have a comprehensive education center with a trading academy, additional articles, glossary, FAQs, and a list of assets that the company offers. There will also be a demo trading platform that you can use to practice placing trades before you move onto the live platform. Avail yourself of all of this educational material to ensure you know what you are doing before you start trading on the live platform.
Avoid indecisiveness
Don’t vacillate once you have determined what trading strategy you are going to employ. Once you have made up your mind on what to trade, stick to your decision. Trust yourself even though it can be scary watching the continued volatility in the global financial markets. However, if you change your investment strategy in the middle of trade, you run the risk of losing your initial investment.
Refrain from placing large trades
During volatile and unstable market conditions, it is advisable to invest small amounts when placing trades. In this way, you will protect your investment capital should the market move in the opposite way to everyone’s expectations.
Final words
There is no doubt that, in the current geopolitical and socio-economic instability, it is more of a challenge to trade successfully on the global financial markets; however, with thorough research and proper planning, you stand a good chance of investing successfully.
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