The binary options market has exploded in recent years, providing a number of unique opportunities for traders around the world. While it’s natural for new financial products like binary options to evolve, the emergence of new markets raises a range of issues for traders and regulators alike. If you’re looking for a legitimate and trustworthy binary options broker, it’s important to analyse these issues carefully before putting your money on the line.
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The world of binary options can be both exciting and rewarding, however, it’s very easy to get confused when you’re just started out. While the explosion of binary options has led to a proliferation of online information, not all content is created equal. When choosing a broker, you have to look beyond the marketing headlines and ask the kind of questions that allow you to discriminate between brokers.
When selecting a binary options broker, you need to pay close attention to the payout structure on offer. Because traditional commissions and bid/ask spreads do not exist on binary options, the cost of transactions can be opaque and difficult to understand. Instead of analysing costs separately, it’s important to analyse the percentage return in order to ensure you will get sufficient returns on money invested. Percentage return is related to the break even trade ratio.
Percentage return varies between brokers and assets, with some brokers calculating the return based on real time market prices and others using their own proprietary algorithms to calculate the return. Percentage return should reach 65 to 70 percent to make it competitive, with returns of 80 to 85 percent and over 500 percent sometimes seen on High/Low options and One Touch options respectively. With binary options, some brokers also include a payout for out-of-the-money trades, while others do not. Due to the binary nature of these trades, this can have a big effect on overall success.
While not as sexy as payout amounts or as important as capitalisation, customer service is a key factor to consider when choosing a broker. There will be times when you need to communicate with your broker, so either live-chat or quick email contact is an absolute necessity. Depending on where you live, the different language options available through the website and chat may also come into play. While contact availability is the most important factor when it comes to customer service, welcome bonuses and trading promotions may also sway your decision.
Regardless of the instrument you’re trading, you will be interacting with some kind of trading platform. With binary options, the majority of platforms are web-based, meaning they operate on the Internet rather than through a dedicated application. Many binary options brokers operate through larger platforms such as SpotOption and Tradologic, placing their own branding onto licensed software rather than producing their own proprietary platform. In the world of binary options, this is common practice and shouldn’t raise any concerns.
While a web-based trading environment does have its advantages, there are potential dangers to take into account. Online security becomes a big issue with web-based trading, with both the trader and broker needing to do everything possible to secure the trading environment. As well as ensuring you have the appropriate security on your computer, you should also make sure your trading platform has been encrypted with a 128 bit SSL encryption key. One big advantage of web-based trading is its independence from a host computer, meaning you can trade on any device connected to the Internet. Some of the larger brokers have also started to implement mobile trading, with specific apps available for phones and tablet devices.
It’s always important to analyse the sustainability and reliability of brokers, something best achieved through reviewing their reputation. While it may not be a quantifiable factor, the reputation or ‘word of mouth’ of a binary options broker is one of the best ways to make a selection. Reputation can be easily analysed through customer reviews and trading forums, as long as you have the ability to be discriminating. For example, while a simple search into a broker can provide you with a lot of information, you may have to take disgruntled traders and competing brokers into account when making a decision.
Although this is a complex issue, regulation is an important factor to take into account when choosing a binary options broker. While regulation is rare in the world of binary options, client money is not necessarily kept in a trust account, and transactions are not monitored by third parties in non-regulated platforms. The financial regulatory framework governing the operation of brokers differs around the world, so you have to analyse the situation with respect to your broker’s location.
In the United States, brokers are self-regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organisation of the brokerage industry and Securities and Exchange Commission (SEC). The U.S. Commodity Futures Trading Commission (CFTC) also oversee the regulation of futures, options and swaps trading in the United States, and have recently issued an Investor Alert to warn about fraudulent promotional schemes involving binary options and binary options trading platforms.
In the United Kingdom, the Financial Services Authority (FSA) takes care of regulation, with individual member states of the European Union (EU) having their own respective regulatory bodies that follow the legal framework standards established by the EU. It’s important to note, however, that regulation is not the be-all and end-all of investment security. The binary options industry is almost completely unregulated, with estimates of 95 percent unregulated coverage around the world. Most regulated brokers are located in Cyprus, where they are regulated by the Cyprus Securities and Exchange Commission (CySEC).
The market capitalisation of binary options brokers should always be taken into account – after all, you’re letting them hold onto your money. While regulated brokers need tens of millions of dollars in their accounts to even apply for regulation, the situation is mixed with unregulated platforms, especially with regional variations. Recent regulations in the United States require all brokerage firms to have at least $20 million dollars in capital in order to operate. This information is monitored by the National Futures Association (NFA) in conjunction with the Commodity Futures Trading Commission (CFTC), with data for individual brokers available on their website.
The situation in Europe and the rest of the world is not as clear cut, however, with many binary option firms relocating from the U.S to Europe just so they don’t have to meet the appropriate capitalisation requirements. While some EU nations are also putting capitalisation regulations in place, traders are always advised to do their homework first before investing money. If you’re unsure about capitalisation, it may be a good idea to ask the brokerage you are trading with, along with related issues such as whether they hedge themselves and whether they are underwritten by third parties.