Spread betting and binary options have been sweeping the financial markets for some time now; many traders are drawn by their qualities: it is easy to get around them, you do not require a lot of money to do that – great for a trader on a budget. Most importantly, they offer lots of opportunities to savvy entrepreneurs.
How do they work?
Spread betting requires you to determine two prices (this is called “the spread”): the bid and the offer; the lower and upper price, respectively. If the price moves below the bid, or above the offer (depending on what you chose to bet on) you earn money based on the difference between the price you named and the actual price. Likewise, if your predicted price direction is wrong you lose money for every currency unit or pip you missed. For instance, if you place a 100 dollar bid and a 105 dollar offer on a security and say, you bet on the bid – i.e. that the price will fall below 100 dollars, this time tomorrow (and it does). You get a predetermined amount of money for every dollar between your bid and the achieved price. Or, if you lose (the price ends up higher), you have to pay up for every dollar you missed. In the binary option analogy, the amounts of money you stand to win or lose are predetermined are capped, regardless of the discrepancy. You determine a 100 dollar price and bet on whether the price of the security in question is lower or higher after a period of time.
Similarities and differences
Like binary options, spread betting does not require you to own financial instruments (securities) you are betting on, so liability is not an issue here, either. Both spread betting and binary options come down to predicting the change in price. Binary options risks and rewards are predetermined and capped, while their spread betting equivalents are not (not as much, anyway). Binary options are easier to win, but spread betting offers greater rewards. Another good thing about binary options and spread betting is their versatility – they work on stocks, currency pairs, commodities etc. The only problem is, spread betting is not as available as binary options as some countries treat it as gambling – in others, it is actually preferred.
It all comes down to what kind of a speculator you are, and the kind of securities and markets you bet on. On volatile markets, risks are greater, but so are the rewards – especially for spread betting. On relatively stable markets (and in general), binary options are a more prudent choice. You need to ask yourself: is the risk worth the reward you stand to get? If the answer is anything other than a strong “Yes!”, then binary options are the safe bet for you. Otherwise, go for spread betting. After all, what could possibly go wrong?