Definition: Binary trading is a type of investing where investors have to predict the result of a yes/no situation by the end of a determined period. Binary trading indicates that investors can choose from only two investment possibilities, in which the payoff is either a fixed amount of money as compensation or nothing at all.
What Does Binary Trading Mean?
In binary trading, buying the binary indicates that, for the investor, the outcome will be true, while selling it shows that the investor is guessing the result will be false. The only two pay-offs are a total dollar amount at the end of a pre-established time period or losing the entire investment. In financial markets, investors predict, for example, the fluctuation of the value of a certain asset during a defined period of time.
If he manages to forecasts the asset’s price trend, he obtains a set dollar amount for his investment according to the binary agreement. But if he guesses wrong, the entire investment is lost. Binary trading alternatives have two main classifications: the cash-or-nothing type, which pays some fixed amount, and the asset-or-nothing kind, that pays the value of the underlying asset according to the investment contract. Investors use binary trading to invest in commodities, stocks, and currency exchanges.
Let’s look at an example.
Mr. Jones enters in an online binary trading where he purchases a cash-or-nothing binary call option on Orange Company for $200 with a final pay-off of $2,000. The call option implies that the value of the asset was above $200 at the end of the agreed investment period.
If the investment rose above $200, Mr. Jones will receive a pay-off of $2,000. If the investment fell below $200, the investor loses all his money. At the end of the time period, the shares final price went up to $210, entitling Mr. Jones to $2,000 in cash.