What is it?
A type of gambling, rather than investing, where you trade on an asset rising or falling in value within a set time.
It is something of value that can be traded, without the need to own it.
For example, a company's shares can be an asset. You could trade on its value going up or down without owning any shares.
How it works
When you make a trade in binary options you choose how long the trade will last, then you are told what your potential return will be if you are right.
This means you earn a fixed amount if your trade wins, unlike investments.
There are three possible outcomes:
If you are right, you make a profit
If the value of the asset is the same, you get your money back
If you are wrong, you lose the money you traded
Some companies offer potential returns that would double your money. However, the higher the potential return is, the riskier the trade.
No, binary options is considered gambling so is not taxed in any way.
What you can trade on
You can trade binary options on several assets, including:
Currencies (forex): These are always traded in pairs, e.g. AUD/USD
Commodities: Such as metals and energy
Indices: Such as the FTSE 100 (UK) , DAX30 (Germany) and S&P 500 (US)
Stocks: This is the value of a company's shares
Choose a type of trade
There are several ways to trade binary options, and how you make money from them differs:
High/low: You bet on whether the market price at expiry will be higher or lower than the market price you started with.
Range: You bet on whether or not a market price will end within a set range. If at the end of the time you are right, you make a profit.
One touch: You get a target price, which can be higher or lower than the starting price. You bet on the price reaching the target within the time.
No touch: This is the opposite of one touch. You bet on the price not reaching the target within the time.
Pairs: You bet on the price of two assets, e.g. gold against silver. If you think gold will outperform silver, you bet up. If you expect silver to perform better, you bet down.
Ladder: You make several bets at once, with different expiry times. This means you could get partial payouts if some of the bets go in your favour.
Depending on the company, you could choose to trade in binary options that last just 60 seconds, or as long as several months.
Is it regulated?
Yes, all UK based binary option companies are regulated by the UK Gambling Commission, rather than a financial regulator.
This is because trading in binary options is a form of gambling, rather than an investment.
Binary option companies that are based overseas do not need a Gambling Commission Licence to trade, so you should try and avoid them if possible.