When you think of investing, if you're like most people, stocks are the first thing you think about. That's because stocks are one of the longest standing and most trusted investment vehicles around today; starting with the formation of “joint stock companies” which began between the turn of the 17th century more than 400 years ago. Because stocks come with a high level of familiarity, they are one of the most traded derivative assets in the binary options market today.
What Are Stock Binary Options?
Stock binary options, like any other binary option is a derivative investment that gets its value from the underlying asset; in this case, the stock. Therefore, instead of purchasing shares of the company, the trader is simply making a prediction on which direction the value of the stock will move. If the trader believes that the stock is likely to climb in value, he would purchase a call option. It it's believed that the stock will fall in value a put option is purchased. If the prediction proves to be correct by the expiration of the trade, the trade expires in the money and the trader realizes profits. Adversely, if the prediction proves to be incorrect, it will expire out of the money and the trader will take a loss.
Why Trade Stock Binary Options Instead Of Traditional Stocks
Binary options are a very unique investment vehicle that comes with several perks that you're not likely to find trading stocks traditionally. For example…
- Access And Affordability – For beginners, affordability often limits access to specific trades in the stock market. After all, if you start out with $500, most brokers won't work with you. Even if they do, you run into the problem of not having enough capital to properly diversify your trades. After all, one share of Amazon at the moment could deplete more than 80% of your capital. In the binary options world, things work a bit differently. Since the value is derived for the stock, traders can place trades at as little as $25 a piece. Ultimately, this allows the trader to properly maintain loss exposure through a diverse trading plan!
- Potential Profits Are Very High – In the stock market, a great day for a stock would be a climb of between 5% and 10%. However, in the binary options market, the average return on in the money trades is over 70% and can be as high as 80%. So, trading stocks with binary options can be a far more profitable venture.
- Manage Risk Easier – Binary options are a this or that proposition. Meaning that if your prediction is correct “X” will happen and if your prediction is incorrect “Y” will happen. There are only two possible outcomes. As a result, the trader knows exactly how much money he stands to gain and exactly how much money he stands to lose. This unique factor in trading binary options makes managing risk and loss exposure a much more simple process.
- Ease Of Trading – Because of the fact that there are only two possible outcomes, binary options trading is relatively simple. With a little bit of market analysis, it's not very hard to predict where a trend is headed. If it's headed up, the trader purchases a call. If it's headed down, a put is purchased. The bottom line is that investing doesn't get more simple than that.
- More Excitement – Let's face it, we all look for excitement in the things we do; and for most people, trading stocks traditionally simply isn't exciting. We want things to move faster, gains to be higher, and more and more opportunities. Because binary options have expiry periods as low as 60 seconds and incredibly high returns, it's much more fun to trade binary options than it is to trade traditional stocks.
**Make sure you work with a trusted broker. You can find a comparison of binary options brokers on our website**
What Factors Should The Binary Options Trader Watch When Trading Stocks?
Binary options derive their value from the price movements of the underlying stock. So, for a binary options trader to be successful, it's important to understand and watch the factors that are likely to cause a stock's price to move. Those factors include…
- Company Performance – Every quarter, publicly traded companies release earnings reports and other performance data. As a binary options trader, it's important to watch for these events as they tend to cause massive changes in the value of the stock. If earnings reports are positive, we tend to see great growth, if they're negative, the opposite happens.
- Product Launches – Every company has a product, and generally strives to create more and more products. For example, we see a new iPhone almost every year. When companies make announcements that new products are being released, their stock tends to rise in value.
- Market Sentiment – There's no doubt that the biggest factor in market movement is the investors that purchase and sell stocks. If the overall opinion among the investors is bearish, we see the poor market sentiment leading to declines. However, if investors feel bullish overall, we tend to see growth in the market.
- Monetary Policy – Following the financial crisis of 2008 and 2009, the US Federal Reserve enacted monetary policies that were designed to stimulate the economy. In doing so, interest rates were reduced and bond purchases were made; ultimately making earning money in the market easier and pushing values of stocks into a bullish trend that has lasted for several years. So, by watching monetary policy, you can get a good idea of where the value of stocks are likely to go.