Trading in binary options requires a very different approach to trading on the stock market. The concept of investing in the stock market revolves around finding shares to buy at a good price in a company that is likely to grow and be successful. At some point in the future the shares will be worth much more than you paid for them and you can sell them to make a profit. This is a long term investment strategy. Binary options are a much shorter strategy and do not involve buying shares; instead, it involves purchasing an option. This option states that the price of an asset will move in a specific direction or even reach a specific price, within a specific timescale.
Once the trade has been placed there is not usually an option to adjust it, you must wait until the agreed timescale is up. If your prediction was correct then you will receive an agreed rate of return. This can be a significant amount of funds, rates of return are usually between seventy and eighty percent. In general a trade will expire at some point between sixty seconds from the start of the trade and the end of the working day. This means that an investment of $100 can quickly become $170 after just one trade. Because you can place multiple trades in one day this is likely to expand during the course of the day. But, as stated, if your prediction is wrong; you have nothing; even your $100 is gone.
The question as to whether this type of trading is legal often arises as many people see this type of trading as similar to betting; the confusion surrounding this can prevent people from trying binary trading and making a good rate of return. In short, it is regulated in the US and is legal. However, it is useful to understand a little more about it before you decide if it is the right option for you:
When binary trading first came into existence there were no laws, it was a new way of investing. In fact, it was not allowed on the stock exchange but was traded over the counter at many establishments. There were no laws prohibiting this type of trading so, by default, it is legal.
It was not until 1973 that the US government decided it was time to regulate this type of trading. This was done by creating the Chicago Board Options Exchange and tasking them with regulating binary trading. Shortly after this was established the Options Clearing Company became the regulatory body. If a broker failed to comply with their regulations they were likely to be banned from trading for life.
It was not until 2007 that binary options was permitted to be a mainstream investment option and could be traded against the biggest stock exchanges in the world.
It is, therefore, legal to trade binary options. However, this does not mean that every broker is legal! A US trader must use a brokerage which is licensed to trade in the US. However, there are many US binary options brokers which are regulated in Europe and not licensed to trade in the US. These traders are probably genuine but may still create legal issues for you. There are also brokers who are registered outside of the EU and do not comply with any regulations; these are the ones which are highly likely to become involved in fraudulent activities and leave you in legal trouble.
A regulated broker, whether US or not, will have to adhere to strict financial guidelines and is unlikely to provide you with any legal issues. However, you must recognize that it is possible, only a broker with permission to trade in the US will offer you complete protection.
Before you start trading or create an account with a broker it is advisable to confirm the local rules and the authenticity of the broker.