Binary options enable you to make (or lose) money by predicting the short term movements in price of a share, commodity, currency or index. They may promise to make you money quickly, but like gambling, you could lose all of the money you’ve invested. The FMA thinks binary options are very high risk, even for experienced investors.
Key things to know if you’re thinking of investing
- Binary options aren’t generally regulated in New Zealand, so you need to take extra care before investing
- Slick marketing techniques make it look much easier (and safer) than it really is
- There’s a very high chance you’ll lose money
What are binary options?
Binary options enable you to make (or lose) money by predicting the short term movements in price of a share, commodity, currency or index. Usually the timeframes are short and you don’t have long to make your call – in some cases less than a minute.
For example you might put money on your guess that a share will trade above its current price in the next hour. If you guessed correctly you could ‘win’ a fixed amount of money. If you guessed incorrectly you would lose the money you invested.
Binary options may also be known as ‘all-or-nothings’, ‘fixed return options’ or ‘digital options’.
Types of binary options
The main types of binary options are:
- High/low – you predict whether the price will be higher or lower than the current value (the strike price) when the option expires.
- One touch option – you predict whether you expect the price to hit a target (a strike price) above or below the current price. If the price hits the target just once before it expires, you’ll make money. If it doesn’t hit the target, you’ll lose the money you’ve invested.
- Range option – you select a price range you expect your asset (for example a share) to trade within until the option expires. If the price stays within the range, you receive a fixed pay out. If it moves outside the range, you lose your investment.
Buying binary options
Most binary option providers operate through an online platform. You have to make a minimum deposit to set up an account before you can start trading. There’s usually also a minimum amount you need to place on a trade. Once you’ve placed a trade, in most cases your money is locked in until the option expires. If you decide you’d like to stop trading, you should receive the balance of your account back. This is the initial sum you invested, plus or minus any wins or losses. Make sure you confirm this before paying your deposit.
Things to look out for
- Making money from investing in binary options isn’t as simple as it looks. Most online platforms make binary trading look easy by promoting a simple three-step process – online tutorials, educational materials and pop-up chat boxes. Don’t be fooled. Guessing the short-term movements of a share price, currency, index or commodity is extremely difficult, even for professionals. It’s possible to lose a lot of money trading in this way.
- Options offering high pay outs (up to 500%) are likely to be structured in a way that makes the probability of winning quite low. If it seems too good to be true, it most likely is.
- Some trading platforms have refused to credit customer accounts or reimburse accounts after accepting money. Most foreign traders are unregulated. This means there’s little oversight and there’s a higher risk the provider may default on its payments or the investment could be a scam. See our warnings, alerts and scams page for tips on how to protect yourself.
- By investing in binary options, there’s a higher chance you could become a victim of fraud. Online platforms may not be regulated, which makes fraudulent behaviour much easier. We’ve been advised of platforms manipulating software so the provider doesn’t have to pay out. Examples include changing the duration of the trade so it generates a loss or cancelling the trade altogether.
- Another example of fraud is identity theft. This is where online platforms use or share the customer information they collect, without the customer’s permission.
Ways you can reduce your risk
Be very wary of investing in products that are only available on the internet. Many of these businesses are based overseas. This often makes it impossible for you to recover your money.
Ask the provider what type of financial service provider licence they hold. If they don’t have one, don’t deal with them. If they say they’re licensed, ask them what type of licence they hold and check our lists of licensed providers to make sure.
Be aware of providers offering ‘training’ and ‘tools’ that promise a particular product or technique that gives access to easy money. While software programmes and training courses can teach you how to make binary trades, no person or programme can ever accurately predict how those trades will move.
Never provide copies of your credit card, driver’s licence or other personal data online. This puts you at risk of identity theft.
Where to get more information
For more information about binary options, speak to a financial adviser.
Learn more about: