Trading stocks and currencies with binary options is possible and is an excellent alternative to classic online trading.
After all, both stock trading and forex trading are two very well-known forms of trading all over the world.
Nowadays we have all heard of the stock exchange and the Forex market (or the currency market). In fact, online trading is increasingly used as an alternative form of investment.
Often, however, small investors have difficulty when they want to start investing in stocks or on forex currencies, because the amounts required are too high for them.
And so we are targeting other financial instruments, such as binary options and CFD contracts.
In our article we want to focus on binary options and how you can use them to trade stocks and currencies. Binary options require a low initial investment, since it is possible to start trading on stocks and currencies through binary options even with only € 100-200.
Through binary options it is possible to invest on different assets, such as:
- Forex currencies.
- Stock indices.
When investing in a binary option, it is necessary to predict whether the price of the asset we have chosen will increase or decrease at the end of a certain period of time, also chosen by us (called “Expiration“).
In the event that our forecast proves to be correct, then we will earn the so-called “Payout”, which is a percentage (usually between 70-90%) on the investment made. So, if we invest € 100 and have a Payout of 80%, then we will earn € 180 (a net gain of € 80).
Obviously there are different types of binary options: the ones we have just exposed are the classic high / low binary options (also known as call / put).
Trading on stocks with binary options
Binary options work differently than the classic stock market, but they can be used in the same way to speculate on the trend of the value of the shares. The main difference here is that with binary options you will never buy or sell stocks.
In fact, in the traditional stock market, it is possible to buy and sell stocks; and every time you buy shares, you become a minority shareholder in all respects of that company, with the possibility of also receiving dividends on an annual basis.
This does not happen with binary options, since there is no exchange of equities. In fact, there is simply a speculation about the future value of the shares, without owning them. This also avoids paying commissions to buy and sell stocks: when you want to invest with binary options, you only have to choose how much to invest and you will never pay extra commissions.
But how can we choose the stocks to invest in? First of all, we always advise you to stay updated on the performance of the stock market. The news tend to strongly influence the performance of the shares: that’s why we must always use an economic calendar.
Our second advice is to diversify. That is, to invest in stocks belonging to different sectors: in this way, if a sector has negative performances, you can always absorb the losses with the positive performances of the other sectors.
To explain it with a trivial example: avoid choosing all stocks belonging to the banking sector as an asset for binary options, but perhaps choose a stock from the banking sector, one from the industrial sector, one from the technological sector, etc … You will certainly have an excellent choice on the stocks to invest in, given that thanks to binary options you can choose from the main stocks around the world.
Our last advice regarding investing in stocks with binary options is the following: remember to take advantage of the correlations. We are talking about the classic cause-and-effect relationship. If company A and company B are operating in the automotive sector, and the news of a decrease in production for company A comes out, it is obvious that in addition to a drop in the value of the shares of company A, there will be an increase in the value of the shares of company B (because if company A produces fewer machines, company B will be able to steal a part of its customers thanks to a higher production).
Trading on stock indices with binary options
After talking about stocks and currencies, it’s time to introduce stock indices.
With binary options it is also possible to trade on stock indices. But what are these indices?
Stock indices always belong to the stock market, but instead of representing a single share, they represent a “group” of equities.
In other words, each share index reflects the general performance of a set of stocks grouped according to a specific criterion (usually based on the capitalization of companies listed on the Stock Exchange, or on the best performing stocks in a given sector).
Stock indices represent the performance of an entire sector of the economy of a country: therefore their movements often are contained with respect to the individual variations of the stocks that are part of it (since they take into consideration the values of multiple stocks and make an average).
If we want to use them to invest with binary options, it is of fundamental importance to remain informed on the main stocks in the sector which is represented by the index on which we want to invest.
Also in this case, thanks to binary options it is possible to invest on the stock indices of the main world stock exchanges.
Before doing so, however, let’s find out about the various types of stock indices and how they are calculated, as well as knowing which stocks are included in the index.
Trading on Forex currencies with binary options
But with binary options we also have access to the currency pairs of the Forex market, which allow us to further expand our possibilities to invest with binary options.
The Forex market is the most liquid market in the world, where trading takes place 24/7 for 5 days a week. It is an over-the-counter market, or a decentralized market that does not have a general headquarters (as is the case with national stock exchanges).
Thanks to binary options, you can also choose currency pairs as an asset to invest in.
Obviously there are currency pairs more traded than others and these are those related to the main currencies, such as the Euro (EUR), the US Dollar (USD), the British Pound (GBP) and the Japanese Yen (JPY).
The most traded currency pair in the world certainly remains EUR / USD, also because most of the business globally takes place in dollars or euros. In forex, EUR / USD is definitely the most liquid pair of all.
If we want to choose currency pairs to invest in binary options, also in this case we have to follow an economic calendar.
Not only that, you have to stay updated on the economic and political news of both nations regarding the currencies that are part of the pair on which we want to invest. You should also pay attention to the decisions of central banks, which deal with managing monetary policies and national currencies.
But in addition to staying informed, which is a must for any asset you want to choose, you also need to consider the Forex trading hours.
The Forex market is always open during the week, so it is not like the stock market which opens at a certain time in the morning, and closes late in the afternoon (obviously following the local time zone).
The Forex market has times when more traders operate and times when less traders operate; as well as times when certain currency pairs are traded more frequently than other pairs.
As you can see from the image above, during the opening hours of the most important world stock exchanges, traders operate using different currencies.
For example, it is normal that during the opening hours of the Tokyo Stock Exchange there are important exchanges involving currency pairs with the Japanese Yen (JPY); on the other hand, during the sessions of New York and London (therefore American and European exchanges), it is normal to see soaring in the exchanges of pairs such as EUR / USD or other pairs with Euro, US Dollar and British Pound.
We therefore need to know how to use these times in our favor, to know when is the best time to invest in certain currency pairs.
IQ Option: binary trading broker
One of the best brokers to do online trading with binary options is IQ Option.
It offers all traders the opportunity to do trading and invest simply on many assets with the best binary options strategies.
We always recommend trying to trade and testing binary options strategies by practicing with the demo account.
If you are not a very experienced binary options trader, you should know that IQ Option is the broker for you.
IQ Option offers you a demo account with which you can:
- learn how to read the trading charts;
- understand the meaning of each marker or indicator;
- master all the vocabulary associated with binary options trading
Choose to invest with IQ Option also choosing to receive information about the various variables that can affect business models, such as global finance and political events.
IQ Option wants to offer you the best of trading conditions and to do this it offers you a totally free account to practice with binary options.
If you then decide to open a real account, you will always be able to use the demo account, but remember that you can trade with the real account with minimum trades of € 1 and a minimum deposit of € 10.
You can also choose to follow all the training courses that IQ Option offers, in order to get familiar with binary options trading, through which you can understand how to move the first steps in this market.