Friday, March 2, 2012

A Quick Guide To Binary Options For Beginners

Most people have a general idea of what the word "investing" means, but it can often be confusing for beginners who are trying to learn more about different types of investing. It's not like you can just go to your local bank and say "hi, I want to invest." Well, you probably could, but that's probably not the best way to go about doing it, especially if your bank makes money on commissions.

When it comes to investing in the financial markets there are a few different options. The most common include:

Stocks - Stocks represent shares of ownership in a company. If the stock goes up after you buy it, you make money. If it goes down, you lose money.

Options - an option is a contract for the right and/or obligation, depending on the type of option, to buy or sell a certain amount of shares of a stock at a certain price at some point in the future.

Futures - a contract between two parties to buy or sell a specific asset in the future at a price agreed upon today.

Forex - trading one currency against another (for example, US dollars vs. British pounds, or Euros vs Japanese yen)

This article will take a look at a specific type of option: binary options.

Unlike standard options, binaries are much, much simpler.

Regular options involve complex formulas and values that change continually from the time you buy or sell the contract until the moment it expires. While it is possible to make a lot of money with options, it requires a lot of knowledge, strategy, and perhaps even a bit of luck.

Binaries, on the other hand, are much easier. A binary option is basically a bet that as of a specific time on a specific day, the price of the underlying stock will be either higher or lower than a certain price (called the "strike price"). If you bet correctly, you get paid. If not, you don't. The payout amount is determined beforehand.

With regular options, the value of the option will vary based on how high or low the price is above or below the strike price.

With binaries, you get paid the agreed upon amount whether price is $0.01 or $100 above the strike price.

So here's an example:

Say stock XYZ is trading at $49 per share and you think that by Friday it will be trading at over $50 per share, so you buy a binary option with a strike price of $50.
When Friday rolls around, stock XYZ is trading at $50.21 per share. You get paid whatever the agreed upon payment price was.

If, on the other hand, XYZ is trading at $49.99 or below on Friday, you do not get paid.

1 comment:

  1. I am not really clear about the strike price, could you en light me?. Thanks

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