Scam: a fraudulent or deceptive act or operation.
The Basics of Binary Options
When you trade binary options, you are essentially betting on whether the value of the underlying security will be above or below a predetermined price (the strike price) when the option expires. If you believe the value will go above the strike price, you purchase a call option, and if you believe the value will go below the strike price, you purchase a put option. Therefore, there are only two possible results:
- You were correct in your prediction! You receive a set amount of cash, or a fixed amount of the asset.
- You were wrong. You essentially lose the money used to purchase the option.
Binary options are sometimes called “all-or-nothing” options because you either receive the entire payoff or nothing at all. The positive aspect to this system is that you can only lose the fixed amount that you spent purchasing the option. However, people that are not familiar with binary options can easily lose all the money that they’ve invested, if none of the trades go in their favor.
Why Do People Think This is a Scam?
There are three main reasons people call binary options trade a scam:
- Many people try it without understanding the operating principles, so they feel cheated when trades don’t go in their favor.
- People don’t like to be wrong or lose money. They would rather blame a company instead of acknowledge their mistakes.
- They were actually scammed.
I want to be very clear: there are plenty of real scam sites to be wary of. But a large amount of the “scam” accusations relating to binary options trading have nothing to do with a scam.
By making a riskier investment with your money, you are allowing for the potential of higher returns. This is the reason why people with a poor credit history pay higher interest rates on loans. If you’re happy receiving a lower rate of return, there are plenty of low risk investments available, such as Treasury bonds.
Scams occur in almost every industry, but are much more frequent amongst financial companies. Many people don’t understand exactly how financial products work, and are willing to trust any broker that promises massive potential returns.
When it comes to trading binary options, here are some handy ways to differentiate the scammers from actual brokers:
- Understand how binary options work. No matter what the circumstance, you should never invest in areas that you don’t understand. You will almost always lose money.
- Talk to people. Call up the customer service line and ask some questions about the platform, binary options trading, and the stock market as a whole. Take down that person’s full name and direct phone number, and call them a few days later. [Don’t use the Live Chat; try to speak with an actual person]
- Check the address. Find out where the company is based, and if the country has poor regulatory infrastructure, try somewhere else.
- Look at the Press page of the company’s website. If they have received press from reputable news organizations, they’re unlikely to be a scam. But make sure to actually read the article on the website of the news organization! If you can’t find the article, call customer service and ask for a link; simply having a Bloomberg logo on their press page means nothing.
Be Smart With Your Money
You worked hard to make your money; don’t blow it recklessly.
- If the service seems untrustworthy, but you want to try it, open an account with the minimum balance possible.
- Never spend all your money on one or two trades. Any person that advises against diversification is not on your team.
- It’s fine to take general investment advice. But don’t let people tell you exactly what trades to make, or how much money to put on a trade.
- If you don’t entirely understand what you’re buying, don’t buy it!
Real World Examples
This website looks legitimate on the surface. However, there are several red flags once you dig into the details. Firstly, they are based in Cyprus, a country with questionable regulatory practices. Secondly, if you go to their press page, you will see the logos of Reuters, Banking Technology and Yahoo Finance. But you can’t find a single article on these companies’ websites that mentions TradersRoom. Thirdly, I couldn’t get a representative on the phone. The one woman that spoke to me over LiveChat immediately signed out when I asked for the link to any article by Reuters.
This company is also based in Cyprus, but their parent company, Win Global Markets, is publicly traded and based in the U.S. Additionally, I was able to speak with representatives on the phone. The people weren’t particularly knowledgeable, but they were willing to give their personal information (which could be confirmed through LinkedIn). And though there are several complaints online about people being unable to withdraw their money, but the issue was eventually resolved, or an EZTrader manager directly responded to the posting.
Banc de Binary
A negative sign is that the quotes on their press page seem to be from their own press releases. On the other hand, their World Finance Awards can be confirmed as legitimate. In addition, Banc De Binary’s CEO will directly respond to any queries that you send him. Finally, Banc De Binary is affiliated with legitimate businesses, such as the Mattison PR agency.
[Update April 23, 2013: Nadex is currently the only binary options trading firm registered with the CFTC. There is a $100 minimum initial deposit and no fees to open an account. In addition, they provide the option to learn the basics with $25,000 in virtual money.]