What are Binary Options? Guide for Beginners
Binary options are a type of trading that were very popular with many online traders, but since 2018 they have been banned in Europe and the United Kingdom.
We’ve taken a look at how the ban has affected binary option in the UK, as well as how they work exactly.
Let’s get started.
What are Binary Options?
Binary options are a form of online trading, Usually, a trade would involve a trader predicting the outcome of an event with a yes or no answer. For example, whether the price of a particular asset, (let’s say oil) will go up or down.
The trader will then have to say yes or no. If their answer is correct and the price moves how they predicted then they win profits on their investment. If their prediction is not correct, then the trader will lose their complete investment.
Because binary options are based on this yes/no operation, many regulators came to view them as a type of fixed-odds gambling.
What are the concerns about Binary Options
The main concern about binary options is that there is a high risk element, which has caused many users to lose money. Usually these losses are quite a significant amount of money too.
This is due to the fact that they are priced up in a similar way that fixed odds bets are, because their value is set the likelihood of an event happening.
Traders will therefore be offered lower return amounts for events with a higher probability, and higher returns for events with a lower probability.
The only way to make a profit is if investors are regularly ‘beating the odds‘ and correctly guessing with their yes and no answers.
Unfortunately because the odds are so high for binary options, many traders do not make a profit. The other concern regarding binary options is that because the trades are pretty fast and the duration of each position is short, some investors were forming addictive behaviours similar to gambling addiction.
These worrying behavioural effects plus the high risk odds concerned many financial regulators, which has eventually led to the ban of binary options in the UK and Europe.
Binary Options Ban
Since 2018, there has been a ban on binary option trading in Europe and the United Kingdom. The ban was introduced by ESMA (the European Securities and Market Authorities) in July 2018.
Initially the ban was temporary but has since been extended indefinitely.
Then in April 2019, the UK’s own Financial Conduct Authority (FCA), which is a large and respected regulation body also got involved. Although the ban on binary options had been in place, the FCA decided to make the ruling more secure by completely banning all firms from offering binary options in the UK.
The FCA’s new ruling fully closed any loopholes that would have allowed brokers to continue to offer options to traders. For instance, the ban covered selected binary options that were not included in the original ESMA ban.
So if you come across any online brokers that are still offering binary options to UK and European clients, avoid at all costs as this is illegal, and they are most likely a scam.
However, we should point out that binary options remain legal elsewhere in other countries around the world. It’s just the EEA (European Economic Area) and United Kingdom where they remain banned.
Binary Options Scams
To keep yourself safe when trading online it’s important to use only regulated brokers that don’t offer binary options.
Many consumers in the UK have been targeted by fraudulent binary options companies who are looking to scam investors.
Even though binary options are illegal, these scam brokers will try to advertise via social media to attract new victims.
Normally the adverts are professional looking and will promise high returns for fake binary option bets that never happen.
If someone does unfortunately fall for the scam, the fraudulent companies usually refuse to return any deposited funds to the customer and then disappear.
This is why all illegal brokers offering binary options must be avoided!
In order to keep yourself safe stay clear of binary option brokers, and always check if the firm is authorised and registered by the FCA. If they’re not on the list, they are likely a scam.
The Financial Conduct Authority keeps an up to date register of listed financial services firms. They also keep an up to date list of financial scams and prohibited brokers to stay away from.
Many people still trade online, but they only trade with regulated brokers who offer legal financial products like Forex & CFD’s instead.
Let’s take a look at these alternative products in more detail.
Alternatives to Binary Options
Forex & CFD trading has grown to be very popular in the UK, with millions of traders now actively trading with various online platforms.
The term Forex stands for foreign exchange market, and it is one of the most active markets worldwide, in fact an impressive volume of 5 trillion dollars is traded daily. Forex trading involves trading on a currencies’ value.
80% of traders trade on 7 currency pairs which are known as the Major pairs, for example one of the most popular pairs is EUR/USD. With this example, a trader would buy the Euro and sell against the US Dollar.
If the investor thinks that the Euro’s price will increase against the USD, they set their trade to ‘buy‘. However, if they think that the Euro’s price will drop then they set their trade to ‘sell‘.
If the price moves in the direction that the trader predicted, then a profit on their investment is made.
CFD trading, which is short for Contract for Difference, also allows investors to trade on the price movement of an asset.
Financial instruments available to trade as CFDs include:
For example Bitcoin is a popular CFD asset offered by many brokers. It’s important to remember though that you don’t actually buy and own any Bitcoins, you are only trading on its value.
CFD’s mimic the real price behaviour of assets, so if you think the value of Bitcoin will increase you open a trade position to ‘buy’, and if you think the value of Bitcoin will drop you set your position to ‘sell’.
Like forex, if the price movement follows you expected, then you will make a profit, if not you don’t.
Binary Options vs Forex & CFDs
Forex & CFD trading is still not risk free, which is why successful traders will develop their strategies and use market analysis to help them. However, the risk is lower than binary options, especially as positions are not opened and closed instantly.
There are a few things to keep in mind though if you want to get started with forex trading. First, it’s important to find a regulated broker to use.
Many leading brokers will hold multiple regulation licences, including licences from either the FCA or CySEC which is another major regulation authority in Europe.
Regulation is the key to keeping online trading secure. It also means that brokers must adhere to strict financial rules put in place to keep you and other traders safe.
For instance regulated brokers must let you withdraw money from your account when you request, and use SSL technology to keep your personal info safe online.
We would also recommend that you develop your forex trading skills with the help of a free demo account which are offered by many brokers. Here you can practice trading with virtual money without risking real funds.
When you feel comfortable trading then you should switch to a live trading account.
Here you can learn more about it: https://tradingonlineguide.com/what-is-forex-trading/
Author of this article and founder of Tradingonlineguide.com
My aim is to help you increase your trading knowledge with helpful content. I come from an economic background and have a strong passion for forex trading. With more than 6 years in the online trading world, I want to share my financial knowledge so that anyone can develop their investment skills.
In my spare time I enjoy cooking and travelling.
Here you can learn more about our review methodology.