Binary Options and Spread Betting: 2 ways in which you can bet on the financial markets. But do you understand the difference between the two? Which is the best tool for traders? We also have a page about binary options vs regular options.
Spread betting was developed by a guy called Stuart Wheeler, (of IG Index- one of the most famous spread betting firms). Spread Betting was designed initially for UK investors to circumvent the tax due on profits generated from investing in shares. Profits from spread betting (and all forms of betting) are tax free in the UK since the exchequer has decided that it would be too complicated to work out net profit (where losses are set off against winnings).
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Spread betting involves a pay-off that is based on the accuracy of the bet, rather than a simple "win or lose" scenario that you get in fixed-odds betting. A spread has, by definition, a range of possibilities and you bet on whether the outcome will be higher or lower than the spread (so you win a certain number of pounds for each point that the asset goes up, for example). The downside is that spread betting can come with a high level of risk, with losses or gains in excess of the original amount that you bet. It is similar to leveraged trading in forex- if the market moves a long way in your favour, you stand to make a tidy profit. If it moves against you however, you can experience big losses.
Binary options, on the other hand, are a newer way of retail investors to play the financial markets. This financial instrument is also called Binary Betting. In contrast to a Spread Bet, a Binary Bet is a way of betting on a financial asset with fixed odds. So before the bet, the punter knows exactly his or her risk and potential upside.
A binary option may come into the money if an asset is higher or lower than a specific price at a set time in the future when the option expires, or it can depend on other criteria, such as the price is within a range, or if the price hits a touch price within the period.
Big Growth in Interest
Spread Betting has enjoyed phenomenal growth in the UK in particular. The IG Group is currently worth over £2 billion. Binary Options are a relatively new way of trading the market, but it is also growing fast. While it is unlikely to catch up with Spread Betting volumes any time soon, it is certainly in the chase. Competition in the market is fierce, and this is fuelling rapid growth.
It is Easier to Manage Your Risk with Binary Options
Because binary opions are a fixed odds bet, where you know your total risk before you make the bet (and your potential profit), it is easier to manage your risk with these kinds of bets. Many traders start with binary options, at a broker like Option Bit Binary , and then move on to more leveraged products as they become more skillfull and confident in their abilities. Many traders also use options to hedge their risk on other trades (eg forex trades or spread bets).
If a trader has a position in the markets that trends in the same direction in the long term, he or she stands to generate more profit spread betting, or forex trading. However, the risks are greater, and these kinds of investments require more discipline and experience to keep your profitable trades open and quickly shut down your losing trades.