Novice binary options traders often want to know the difference between this form of online investing and traditional stock trading. There are differences and it is important that the trader understands these differences to be able to successfully trade in binary options. Read on to find out more.
Binary Options and Traditional Trading – Factors That Make the Differences
The differences arise mainly from factors such as risk, how the underlying assets are handled, profitability, difficulty in learning to trade with each of them, and sustainability in the long term.
Whereas binary options trading is all about predicting the direction of movement of the underlying assets’ prices, in traditional stock trading, the trader has to purchase the assets and sell them at a later date when the price is high.
When trading in binary options, the trader has to only predict whether the value of the asset will actually decrease or increase in a specific timeframe that is provided. If the prediction is correct, the binary options trader ends up making a good amount of money. In traditional stock trading, the trader is expected to buy a specific quantity of the assets and then sell them at some point in time in the future when their value is higher to rake in the profits. As far as asset handling is concerned, traditional stock trading is a little more complicated than binary options trading.
Though some traders are of the opinion that trading in online binary options is slightly more risky than traditional stock trading, this fear is actually baseless. The risk factor in this type of investment is pre-decided. The trader will know in advance the exact amount of profit or loss he/she can make or incur. The information is provided even before purchasing the contract.
As an example, if a trader invests ‘X’ amount of money in a binary options trade, the money will be lost if the prediction made by the trader is wrong. In traditional stock trading, the trader will lose a large sum of money, if the value of the underlying asset falls. The amount of profit or loss in this case depends on the whether the price of the asset purchased has increased or decreased in the time that has elapsed since purchase. There is no way in which the trader can predict as to how much the value of the asset will increase or decrease. If the value has increased by a large amount, the trader makes a considerable profit and if the value has decreased the trader experiences a huge loss when he/she sells the assets.
In binary options trading, the gain and loss are known well in advance of the trade. Therefore, there is no chance of a nasty surprise when the trader ends up making a loss.
In terms of profitability, there is no big difference as far as online stock trading and binary options trading are concerned. In both the methods, the trader can make huge amounts of profit if the basic principles of trading are learned and applied diligently while trading. The profitability is high when advanced trading strategies are implemented by experienced traders.
The binary options variant can be considered more profitable because of the fact that the profits are based on the rate of payouts that are made. If the predictions of the trader are correct, a percentage of the investment along with the initial amount is given back. As a typical example, a trader can win up to $400 by just investing $100. However, in traditional stock investing, a profit of about 10 to 20 percent is common. In case a trader wants to generate large amounts of profit, the volumes of sale or purchase of the asset units has to be large.
In addition to these factors the timeframe required to generate profits using binary options trading is very small compared to stock trading. The timeframe offered by most binary options brokers within which a contract has to be executed ranges from a few seconds to a few hours. This is in fact one of the most significant differences between the two online investing methodologies. A binary options trader can generate substantial income in a short span of minutes or a few hours and a stock trader has to wait for perhaps months or even years for the value of the asset to increase to a level so that profits can be generated by selling the units.
As an example, a set of Microsoft stocks that a trader buys today may take days to weeks to increase by a value of even 5 percent. A profit can be made by selling the stocks only after waiting for a long a time. The same amount of money can be made by a binary options trader in a matter of a few hours. Another plus point is that binary options traders do not have to invest in large volumes of the asset units. This is because of the high payout percentages that are offered by the binary options brokers. The income that can be generated by investing just $100 in binary options trading is equivalent to an investment of $1000 or multiple investments of $100 in traditional stocks trading.
The amount of profits that are generated in traditional stock trading can be increased only when large volumes or multiple investments of smaller amounts are made. Ultimately, binary options trading can generate profits faster than traditional stock trading.
Learning the Basics
Learning the basics of binary options trading is far easier than learning the basics of traditional stock investing. In the former, only the direction of movement of the value of the underlying asset has to be predicted. The outcomes are only two in binary options trading: the value of the asset either increases or decreases within a specific timeframe.
If the trader makes a correct prediction, a large amount of money can be made by the trader. A novice trader can start trading in binary options with little or no practice as the principle of operation is very simple.
In contrast, when trading with traditional stocks, a novice trader has to not only predict the direction of movement but also be worried about the extent of the movement to make considerable profits. As an example, if a trader were to buy 100 stocks of Microsoft, and their value increased by a mere 1% in a span of two weeks, the amount of profit that can be realized by selling those shares will be very small.
Whereas, in binary options trading, the trader has to just predict that the value of Microsoft would increase. The extent of increase does not matter (it can be 1%, 0.1% or even 0.001%).
Wrapping up, it is easier to learn and implement binary options trading than traditional stock trading for more than one reason. It is soon becoming a popular method that traders use to generate consistent profits over a period of time.