subject: Binary Options Trading- The Simple Trading Model [print this page] Binary options are derivative securitiesBinary options are derivative securities. These options are directly linked to some other asset or security. They are called binary because they can result in only to possible scenarios for the investor. Either the investor will earn a return on them which means that the option ends in the money, or the trader will not earn any return on them which is called out of money. Binary options are very common to be placed on stocks which are traded on exchanges. However, binary options are not limited to stocks but can also have their value derived from other assets like currencies and commodities. The gains are based on the future appreciation or depreciation of the value of these assets from which their value is derived.
Investors look for different investment options in the market and this need has led many financial analysts to invent new and different kinds of financial instruments. There are financial instruments like future contracts, forward contracts, bonds, treasury bills, and so on. Many of the new securities created by the financial analysts are very complicated and hence, the common investor finds it difficult to understand them.
On the contrary, binary options are very simple and easy to understand. This makes them a very popular area of investment as most investors are more certain about trading in the securities they understand better.
Binary option trading is very common in the financial market. It offers great potential for profit as well as for risk hedging. Binary option trade is generally short term over the expiry date of the option. The option comes with a strike price at which the option can be exercised. It depends on the discretion of the owner of the option weather he or she wants to exercise it or not.
As there are many individuals and institutional investors who want to trade in binary options, it is not possible for all of them to deal directly with each other. For this purpose, the brokers who traditionally dealt with stock market transactions, now also deal in the binary options trading. These brokers earn a commission on the binary options trading transactions made by their clients. The commission is usually in terms of a fixed transaction fee and it can sometimes also be a percentage of the return made by the investor on his or her transaction. Hence, binary option trading is an area with the great profit making potential for all those who want to enter the financial market
by: James Smith
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