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Binary Options: The Fundamentals

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  • 04 February, 2010 GMT
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By: Hillel Fuld

Along with the world’s leading financial markets, such as the Stock Market, the FX market, the commodities market, and many more, comes a smaller scale trading arena with which most people are not familiar.

Every market has its advantages and disadvantages, but some trading options offer traders much more to gain than they have to lose. Binary Options are one such tool. There are many characteristics that differentiate Binary Options from its colleagues, so we thought we would give a basic overview of what makes Binary Options so different and attractive to the retail trader.

Binary Options are also referred to as All or Nothing Options, Digital Options, as well Fixed Return Options or FROs.

To provide a brief summary of Binary Options, in 2007, the Options Clearing Corporation introduced a rule that would allow Binary Options and the rule was then approved in 2008 by the Securities and Exchange Commission. May 2008 was a big month for Binary Options with the American Stock Exchange incorporating them in the form of European cash or nothing Binary Options.

So what are Binary Options? Binary Options provide a unique trading option for the retail trader that offers many advantages over other financial markets such as Forex or stocks. Like the meaning of the word, Binary Options leave the traders with only two possible outcomes. You can either win or lose your investment.

The way it works is as follows. A trader takes a stock, commodity, or currency pair, and makes a prediction about the direction that instrument will move. The expiry date of the Binary Option can be as soon as one hour, and if that instrument indeed moved in the direction of the trader’s prediction, the trader is what is called “In the Money”. That means, they came out of this specific trade profitable.

What is unique about this style of trading, among many other things, is that the trader cannot lose more than the original investment. Either the trader predicted correctly, in which case, they can make up to 72% of the original investment, or they predicted inaccurately, in which case, they lose their original investment, with the possibility of keeping a minimal percentage, based on the broker’s policy.

On the other hand, a characteristic that Binary Options and Forex share in common is that no instrument is actually being traded. There are no goods being traded between hands and all the trading is being conducted virtually, which is an important point to understand.

In conclusion, Binary Options have a lot to offer when it comes to making quick and easy profits, however, being as the options you are actually trading are instruments from other markets such as Forex or Commodities, knowing the market will obviously prove very beneficial in terms of your Binary Option profits.

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