The trajectory of binary betting has largely paired that of spread betting, with the two closely aligned as services offered by spread betting brokers. As a degree of flexibility, binary betting can add significant value to the trader’s portfolio. But aside from flexibility, there are a number of other reasons why binary betting is proving a popular investment method.
One of the key strengths as far as binary betting is concerned is the fact that no matter the degree of market movements, the trader will always profit a fixed amount from an upward rise. This, of course, caps profits at a ceiling, but it allows the trader to capitalize on market direction as a binary, straightforward proposition – i.e. the trader either wins big, or loses in equal measure.
This allows traders to focus solely on the factors that contribute to market or index movement, rather than requiring an analysis of pricing, which can be a particularly tricky, mathematic-intensive and deeply involved process. Simply judge whether a market or commodity will do well or not over the period, and take a corresponding position.
Another handy feature of binary betting is the capped losses it provides. Unlike many other leveraged trading products, binary betting will only ever cost you the multiple of the buy point and your stake. This allows traders to guarantee, with absolutely certainty, their exposure to loss (and indeed the profits available to them) from a given transaction.
These features combine to make binary betting a particularly useful addition to the trading line-up. Many more experienced traders still consider binary betting to be something of a consumer investment product rather than a serious investment opportunity, but this often comes from a place of market snobbery. In actual fact, binary betting provides an extremely useful trading basis for both novices and the more experienced trader, with all the advantages of spread betting, less the volatility in returns.
Advantages of Binary Betting
The advantages of binary betting are often misunderstood by experienced traders, who tend to write off binary betting immediately as an ‘incognito’ fixed-odds bet. While essentially it is true that binary betting presents a fixed odds investment opportunity, there are significant tangible advantages for the trader with an open mind.
One of the main advantages of binary betting that traders often overlook is the tax efficiency point. Like spread betting, binary bets are free of both Capital Gains Tax and Stamp Duty liability, which can deliver a saving in excess of 20% as compared to trading shares. Particularly with a tightening tax avoidance climate in the UK and the likelihood of ongoing increases in CGT rates, this can be a very significant benefit, with a real impact on your bottom line.
Another advantage afforded by binary betting is the inbuilt leverage presented by the transaction. While the leverage isn’t as wild or as straightforward as that afforded by spread betting, for example, it is nevertheless still present.
For example, a fractional one-point movement can realistically generate around a fifty-fold return on your initial stake. At £10 per point or more, this can start to mean serious money.
At the same time, the leveraged component on the downside isn’t as severe as un-tempered leverage products, and is limited to the multiple of your stake and the difference between the price point you either bought or sold and the 100/0 settlement point, depending on the direction of movement and whether you’ve gone long or short on the position.
Similarly, binary betting also allows for easier short-term speculation, at a lower price point that investing directly. Because the commission component is contained within the width of the spread and there are no further commissions or interest charges (because leverage is inherent in the composition of binary bets), it’s a more straightforward calculation for the trader.
The advantages of binary betting make it an option well worth considering for traders of all levels. Whether you’re just starting to trade for the first time, or you’re an experienced investor managing a large portfolio, the benefits of binary betting are manifold.
Disadvantages Of Binary Betting
For all the advantages of binary betting, there are also several correlative limitations that traders are advised to take into consideration. As with all things, there are pros and cons involved in binary betting, so it’s just a case of weighing up both sides of the equation as a balancing act to determine when and how best to utilize binary betting.
One of the main disadvantages of binary betting is their comparatively wide spreads in comparison to other instruments and trading styles. Because binary bets take no consideration of the extent of market movements in either direction, and in comparison to other forms of trading the volumes of binary bets placed are much lower, binary brokers need some way to enhance their profit portion to ensure binary bets are worthwhile, and this often results in wider spreads than with other investment opportunities.
Inherent in the makeup of binary betting as a trading style is the capping of both profits and loss, limited to the difference between the buy/sell price and the 100 or 0 settlement price. This is an advantage on the losing side, but also a limitation on the plus side.
For example, if you buy the FTSE 100 at a spread of 47-51, the maximum earnings you will receive from the market moving positively are equivalent, whether or not the market moves by 1 or 100 points. In contrast, a spread betting position could capitalize on a strong rise in the market multiple times over, thus for a ‘sure-fire’ position showing signs of a heavy positive movement, it may be more viable to opt for spread betting or some other trading style.
Likewise, there is no margin for stop losses (or limits) built into the binary betting transaction. This essentially means that there’s little scope for automatically cutting out of a losing position – by nature, the bet is binary, so losses are taken at 0 on a ‘buy’ trade. Of course, this does have the advantage of bringing certainty to the equation, in the sense that traders are aware of their potential losses before entering the position, but these may be higher than those that would arise otherwise in transactions where stops can be more readily placed.
Binary betting does have its fair share of drawbacks, but as with any method of trading, these tend to be outweighed by the positives, and in particular the flexibility binary betting brings to the trader’s arsenal.