All or Nothing

Before investing in binary options, read this

Dear Sven,

I’ve been reading about a few investment platforms where I can register for online that allow me to manage my investments with relative ease. Some of the platforms advertised seem to offer products producing very
high annual returns, some of which I am not familiar with, such as Binary Options and Contracts for Difference (CFDs). Can you explain these types of products and let me know if they are suitable for retail investors?

In the age of the internet more and more individuals are signing up for investment, securities and trading accounts online. This has unleashed a new “DIY” age when it comes to personal investing, which is fantastic in that it gives individuals direct access to capital markets and ultimately leads to the improvement of the global economy.

The internet also creates a platform for opportunistic service providers to create products and services which are designed to dupe customers explicitly, or are marketed as being relatively low-risk and suitable for individuals to purchase directly, when they are
in fact extremely complex and not suitable for the general public.

Binary options are the proverbial new-kid-on-the-block when it comes to investment products. Platforms offering binary options are marketed aggressively on the internet, and often contain testimonials from customers who claim to make USD5,000 per week from trading while sitting on the sofa. The truth is that the outcome from investing in these products is, by definition, binary. For example, you place a bet and you will experience two outcomes: win some money or lose the entire amount you have invested. The outcome is much like betting on the winner of a football match, which is why binary options are regulated as gambling products and not as financial instruments in many countries.

The mechanics of a binary option are fairly simple: an investor buys a contract with the provider that states, for example: you pay USD100 for a contract that states that if there is a positive move in the price of Apple shares between 11:00am–11:10am, you will receive USD1,000. If the share price has no movement, or
is negative during that time, you
will receive nothing and lose the amount of your initial investment. There are many different return outcomes available for trading on many different underlying securities. I would recommend doing extensive research before doing this type of trading, specifically on the platform itself, as many are blatant scams.

Contracts for Difference (or CFDs) are more conventional instruments and have been around for longer than binary options. They are far more regulated than binary options and give investors the option to profit from moves in a company’s share price without having to physically own the shares. These contracts are bought directly from a broker, and allow investors to profit from indirectly owning a specific amount of company shares by only contributing a fraction of the cost of what the shares would cost collectively. For example, you believe that Amazon is the best, most innovative company in the world and you would like to own Amazon shares. The problem is that you only have USD100 in life savings and one share of Amazon costs around USD900. You could use a CFD where you are only required to deposit as low as 2% of the total value of the transaction you desire. Therefore, with your USD100 you would be given indirect exposure to USD5,000 worth of Amazon shares. If Amazon shares increase
by 1% in value during that specific trading day, your “indirect” investment value will grow from USD5,000 to USD5,050 and you will pocket USD50 which is the difference. So, on a small USD100 investment you have made USD50 profit on your favorite company, which is an equivalent to a 50% return for you. The main pitfall is that this type of investing has a high risk of permanent capital loss, and the trading fees are very high.

Signing up for any type of exotic investment online might seem easy and convenient, but the pitfalls are prevalent and perilous. Try not to use your life savings and pension cash on exotic trading, but rather your casino or golf money.

BIO: Sven Roering is a Managing Partner at Tenzing Pacific Investment Management. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.

Share this story, choose your platform!

Share on facebook
Share on twitter
Share on pinterest
Share on tumblr
Share on google
Share on linkedin
Share on reddit
Share on vk
Share on email
About the author:

Leave a Comment

Fascinating Vape Subscription Tactics That Can Help Your Business Grow

The selling e-cigarette and vape products industry is booming and will keep rising in the following years. The opportunity to start selling e-cigarette and vape items online has never been more fantastic. Starting an online e-cigarette and vape company may be a lucrative and enjoyable hobby, but it requires effort and study to succeed. However,

Read More »

The US and UK Bitcoin Scenario

Bitcoin is a sort of decentralized traditional money that only exists online in an ideal world and is utilized for international trade and commerce. In terms of dealing with the process of utilization of things bitcoin is functionally similar to fiat currency however, it was never intended to work with the current system of middlemen,

Read More »

Why Meeting Rooms Are Still Important for WFH Companies

Over the past few years, a lot of companies have chosen to allow their employees to work from home. Technology means that it is easier to stay in touch and to collaborate on projects, as well as people report they are more productive in a comfortable home environment. But, this does not mean that all

Read More »

Things That Beginner Forex Traders Should Consider

If you have been thinking about getting into forex trading, that’s great! There are many people all over the world who are already trading currency pairs. And with the right strategy, you might be able to make a substantial return on the money you put into this market. But before you get started, there are

Read More »

7 Tips for Selecting the Best iGaming Platform

The iGaming experience is touching the next level with incredible technological advancements. Consider a few points before selecting the perfect gaming platform if you’re a game maniac. Gaming platforms offer thrill, amazing visuals, and excitement. So, whatever game you want to play, here are seven tips for selecting the best iGaming platform. The Game it

Read More »