In the previous article, we covered the differences between investing in assets and commodities, and the risks associated with these types of investments. We also eluded to the fact that investing in binary options can also be risky. In this article, we will discuss what those risks may be, and how you can protect yourself when investing with binary options.
Overview of Risks Associated with Binary Options
When you invest in a binary option, you automatically know that there are two possible outcomes. There are two traders involved. One of them will win, on the other one will lose. Although this seems very straightforward, there are actually three specific dangers and risks when trading binary options that you need to keep in mind at all times.
An Unpredictable Market
You must understand that before you invest in binary options that the market is never really predictable. At any given time, the market can go one way or another, therefore there are no guarantees that you will actually profit after making your initial investment.
The Reward Is Always Less Than the Risk
If you were to invest in commodities, and the market turns in your favor, you could stand to gain thousands of dollars in a day's time from a volatile move in the right direction. Likewise, if it went the wrong way, you would stand to lose a substantial amount of money.
Although binary options represent a limited amount of risk, you have to be right more times than you are wrong because the amount that you stand to gain is always a fixed amount.
Many people that invest in commodities bank on seasonal moves that can offset their losses by achieving substantial gains with one or two profitable contracts. However, in the binary option marketplace, if you make more losing trades than winners, you will inevitably end up losing most of your investments.
No Underlying Assets
Unlike the commodities market, or when you purchase stocks, you can sell at any time when you believe that your investment is going the wrong way. However, with binary options, there is a set expiration date, so even if you know the market is going the wrong way, there is no way to get your initial investment back by selling your option early.
Very Little Regulation
Up until 2008, there was very little regulation of the binary option marketplace. Just a few years ago, the Chicago Board Options Exchange (CBOE) started to regulate this industry, providing more accountability and lessening the possibility of unscrupulous practices. However, there is always the potential for being scammed, something that you need to be careful of when deciding who to work with when investing your money.
In conclusion, binary options offer a lot of advantages in comparison to traditional forms of investing. You know exactly how much you are spending, and how much are losses will be. You also know exactly how much you stand to gain if the market turns your way. However, you also need to keep in mind that there are risks involved when investing in binary options. In the next article, we will discuss how to trade binary options in the most responsible way possible.