Lesson 1. Binary Options. How Do They Work and How Much Can You Earn with Them? 

The binary options market is easily the youngest one in the finance world. At the same time, it is among of the most accessible ways to start trading. With the help of the Internet and advanced online platforms, such as Pocket Option, even a beginner on a small budget can start making good money with binary options. If you are one of them, our course is exactly what you need. Find out everything about investing in binary options from scratch!

In our first article, you will learn the binary options basics. We will cover how this financial instrument works, when did it came to life, who is involved in binary options trading, and more. You will also see how much money you need to start trading and how much profit a beginner can expect to make. By the end of this lesson, you will know everything about the basic principles of binary options!

Things You Will Learn in This Lesson:

1. What are binary options?

2. When were binary options invented? 

3. Are binary options legal?

4. What is the point of binary options and who trades them?

5. How do binary options work?

6. What are the benefits of binary options?

7. How much can you earn on binary options trading?

What are binary options?

Binary option is a financial instrument, which slightly resembles sports betting. It is a digital contract for a certain asset with a predetermined execution date (expiration time). The amount of potential profit is also determined at the time of purchase of a binary option as a percentage of the transaction amount.

The expiration (or expiry) time of a binary option is the date and time when the digital contract, which was purchased by the trader, is settled. You can choose the expiry yourself from the variants offered by the broker. The values vary depending on the type of a binary option and the chosen trading platform. For example, the Pocket Option platform allows you to choose flexible expiration times from 60 seconds to 30 minutes. 

The trader's goal is to make the right prediction regarding the movement of the market price of a financial instrument by the time when the contract is executed. The price of the financial asset by the time of the expiration of a binary option can either rise or fall. In rare cases, the price remains at the same level. If that happens, the trader neither receives nor loses the funds used for the purchase of the digital contract, but receives their cash back in full.

In other words, participants of the binary options market are trying to predict the rise or drop in price of certain financial instruments. Traders have to correctly predict the position of the future price at the moment of fulfillment of the digital contract in order to make a profit. For example, you have predicted that the stock of a certain company will get cheaper in half an hour. If that prediction turns out to be correct, you will make money. Otherwise, the amount you deposited to buy the option will be gone.

The vast majority of other financial markets are associated with much higher risks. Usually, financial trades are managed by the size of the deposit and a special automatic sell order to limit losses (stop loss). When it comes to binary options, risks are strictly stipulated in advance all the time. Even if your prediction turns out to be incorrect, you will only lose the amount for which the digital contract was purchased. It is almost impossible to lose more than you can afford with binary options!

When were binary options invented?

It was the Option Clearing Corporation (OOC) that first granted legal status to digital contracts in 2007. After that, American brokerage companies having the corresponding license could trade binary options. 

In 2008, the financial instrument debuted on the most developed stock market of the world — in the USA on the Cboe Global Markets options exchange. It has been getting more and more popular since then. Binary options were traded on the major stock market indexes by which experts determine the state of the economy in the United States - the Volatility Index (VIX) and S&P 500. 

Are binary options legal?

Many experts refuse to acknowledge digital contracts as full-fledged exchange transactions. It is not surprising since binary options do not resemble a serious investment tool at first sight. Such a point of view can be explained by the high operational risks of the tool. This is also the reason why binary options are often associated with gambling. In 2018, Google and Facebook simultaneously refused to advertise binary options on their platforms.

Supervisory financial authorities in many countries monitor binary options trading services, similar to gambling platforms. For instance, the French regulator AMF considers the activity of binary options brokers unacceptable. The Canadian supervisory authority IIROC has also banned any business activities related to binary options on the territory of the country.

Despite the ambiguous legal status, the popularity of this trading instrument grows from year to year. This is mainly because of the incredible simplicity of digital contracts. Even a beginner with no experience can start trading binary options. In addition, there are many proven trading platforms with a positive reputation that allow you to earn on binary options and make withdrawals without any problems. 

In other words, if you have chosen a good broker with a convenient trading system, investing in binary options is completely safe.

What is the point of binary options and who trades them?

Binary options are a simplified version of regular options. 

An option, in turn, is a contract by which the buyer receives the right (not the obligation) to buy or sell any financial asset (security, commodity, currency, etc.) at a predetermined price at specific time.

The main distinguishing feature of binary options is the fact that you do not need to actually make a buy or sell transaction. When trading digital contracts, the trader just makes an assumption about the future price of a specific financial asset.

Unlike traditional options, binary options offer a much greater level of transparency during trading. The buyer is able to carefully calculate the possible losses and find out how much he is actually putting on the line. 

Because of this and many other advantages, binary options are ideal for novice investors who do not want to wait for a long time for a return on investment or have a very small margin deposit. 

Brokers are also interested in this financial instrument. They always benefit from the increased volume of transactions on the financial markets because they get a small commission on each of them.

How do binary options work?

There are many types of binary options. We will cover them in detail in future lessons but they all work quite the similar way. Your goal is incredibly simple: you need to choose one of two possible variants of the price of a financial asset. Considering such simplicity, binary options platforms usually have user-friendly interfaces and make the trading process as easy as it is possible. 

All you need to start trading binary options is to find a device connected to the internet. Just open the Pocket Option website or another reliable platform and create an account. Congratulations! That is all you need to start practicing on a demo account or trade binary options for real money.

The binary options trading process includes the following steps:

1. The trader chooses one of the assets from the list;

2. The expiration time (the completion time of a transaction) is set;

3. The price of the binary option is set;

4. The assumed price movement (upward or downward) is set.

Most of the time, the first three parameters are automatically preselected by the trading system. They can also be saved from previous trades made. This allows you to purchase a binary option by pressing one of the two buttons – CALL (if the strike price is assumed to go up) or PUT (if the asset is assumed to get cheaper).

What are the benefits of binary options?

Binary options got amazingly popular for many reasons. Here are some of the most important advantages of this financial instrument:

• Very low entry threshold. Traders do not need large savings or a lot of experience to participate in binary options trading. One can start even with a small deposit. For example, you can start trading on the Pocket Option investment platform with as low as $5. Virtually every other alternative types of exchange trading require a much larger investment capital. Many brokerage companies also allow leveraged trading — that is, using borrowed funds to trade.

• Investing in binary options is quick. Most of them are short-term, meaning their expiration time range from 60 seconds to several minutes. This is one of the major differences of this financial tool from the common options, as well as from trading in the classic markets such as Forex. The high transaction speed allows you to quickly achieve a good return on investment and eventually obtain impressive profits. At the same time, wrong predictions can just as quickly lead to the loss of funds.

• Binary options are simple. Even though there are many types of binary options (we will cover them in the following lessons), they are much easier to learn in comparison to other trading tools. Moreover, digital contracts do not require a lot of specific knowledge. For example, trading currency pairs in the Forex market is based on swaps, spreads, bids and other complicated nuances that are hard to understand for a novice investor. At the same time, binary options can be mastered in minimal time.

• High profitability. Experienced traders are able to earn really huge amounts on binary options in the shortest period. Having made the right prediction, you can get up to 85% profit in a matter of minutes provided that you have picked a trustworthy trading platform.

• Flexible schedule. Individual binary options traders work for themselves at any time they want. You can combine trading with your main professional activity. Pocket Option and some of the other trading platforms are available on computers, smartphones and tablets round the clock and anywhere.

• Fully remote work. You can make money trading binary options from the comfort of your home. Just go to the website of the trading platform to make transactions. During the global pandemic, the ability to work remotely is a very important advantage of option trading.

• You can trade on weekends. Unlike Forex, the binary options market allows trading even on weekends. This makes the tool even more flexible and convenient. 

Given all the advantages of binary options trading, it is not surprising that this financial instrument is rapidly gaining popularity among both experienced and novice traders.

How much can you earn on binary options trading?

When trying to predict your potential earnings with binary options trading, never forget that this type of trading is associated with high risks. Your task as a trader is to constantly study and analyze news, markets, price charts, and any other sources of information in order to predict the rise or fall in price of a financial asset at a certain point in time. At the same time, even a very precise and thorough analysis of all the possible factors does not guarantee that you will make the right prediction. There is always some chance to lose money.

On the other hand, big risk comes with big opportunities in the case of binary options. Unlike the traditional Forex market, even novice binary options traders can start earning quite serious amounts. As we have mentioned earlier, you can earn 85% and more from a single bet. In other words, you can bet, for instance, $200, and receive $370 after the right prediction, thus almost doubling the original amount. No other type of trading provides such profit potential. This is what makes binary options so popular.

Many novice traders start working with real deposits and immediately invest large sums right after the registration. This is a terrible strategy for a beginner since they are not experienced enough and can easily get confused when working with real money. Therefore, it is not important how soon you start trading binary options, but how well you can do it.

After practicing on a demo account, you can try to deposit real money and make your first trade. It is worth noting that the smaller your first deposit, the lower the risks. The optimal amount for a deposit is $20, but the Pocket Option platform allows you to deposit as low as $5. When it comes to transactions, they should also be short-term and inexpensive. Thus, you will reduce the risk of losing large amounts to a minimum. Do not get ahead of yourself if you do not want to go bankrupt!

Wrapping Up:

1. Option - is a contract that allows the holder the right to buy or sell a specific financial asset at a specific time at a specified strike price.

2. Binary option – is a bet-type form of option with two possible outcomes: a correct or incorrect prediction of the price movement of a specific asset.

3. Trader - is a person who performs operations to make a profit in the binary options market.

4. Expiration time – the moment when a binary option expires (the date and time), after which it is settled.

5. Brokerage company - is a middleman who connects buyers and sellers to complete binary options transactions through a trading platform.

6. Deposit – a fixed-term investment that includes the deposit of money into a personal account at a trading platform.

7. Trading session – is a period of time that matches the primary daytime trading hours for a given locale.