We get asked this question a hell of a lot. The simple answer is no, they are definitely not the same as spread betting. But if you want to find out more about why read on.
Binary Options have long been lumped in with spread betting but as more and more binary options firms attempt to have their products governmentally regulated they are now beginning to be differentiated from spread betting. Where as spread betting is just that, betting, binary options are financial instruments that fall into the category of trading rather than betting. A simple way to prove this is that with binary options you can only trade on the four asset classes. These are commodities, currencies, stocks and indices. In spread betting you can pretty much spread bet on anything under the sun, including sports events and popular culture.
Binary options also offer some significant advantages over spread betting. One of the major downfalls of spread betting is that once you are in a wager it becomes increasingly difficult to manage your levels of risk. A losing bet can quickly spiral out of control and wipe you out whereas with binary options you know exactly what you stand to gain or lose before the trade has even been placed.
Spread betting is designed to create a balance between either side of a wager's outcome. So for instance if the bet is whether a team will win or not, as in traditional betting, there will be a definite gravitation of wagers towards the favourite. In spread betting a spread is created and the question becomes will the favourite win by such and such a margin. Generally spread betting offers people the opportunity to make great gains with relatively little investment but the downside lies in the fact that huge losses over an above the initial investment can also be made. Besides this aspect of spread betting there are also commissions that are paid to the book maker. Binary options have none of these things to worry about.
In spread betting it becomes easy to lose track of the stakes and fail to properly manage your position sizes and stop loss levels. One of the main mistakes made by spread betters, which accounts for a sizeable percentage of spread betting firms' profits is, the breaking of risk management rules in order to correct a loosing position. One way this happens is that a small position is looking like it will lose, so investors chase the loss, extending the bet in the hope that the market will come around. This happens because they fail to correctly manage their stop losses. A stop loss is something investors put in place to prevent a loosing positions from eating any further into their risk capital. The problem with stop losses however is that they can be moved. Investors normally do this in order to avoid a loss and end up multiplying the overall amount they give away.
Binary options eliminate these issues. First and foremost binary trading should not be regarded as gambling. Educated traders tend to make educated trades, their win/loss ratios are statistically significant. And with binary options you have the benefit of being able to manage your risk extremely effectively. No binary trade ever spiralled out of control and wiped out a traders risk capital. This is because the parameters are set before the trade is ever confirmed. Traders decide how much they want to invest in a particular trade and they know from the outset they stand to lose this initial investment or gain a certain percentage over and above this figure.
But there are also several other noticeable advantages to trading binary options. Firstly they suit all levels of traders with different firms offering minimum trades as low as a single dollar, all the way up to maximum trades of 15,000 dollars or more. Beyond this you have the added security of dealing with an industry that has its sights firmly set on being regulated. This means added safeguards for customers and no funny business with regard to payouts and withdrawals as have become notorious in the online gambling industry.
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.