Want to Make The Most of Short Term Market Movements But Worried About the Risk? Here’s a Simple Product You Can Consider

what is an index fund

You’ll very rarely read an investing success story about someone who meticulously saved up a few hundred dollars a month, and eventually turned that into a huge sum of money. Why? It’s not because it’s not possible. On the contrary, with the power of compounding interest, you can actually make your money grow significantly without having to put in too much if you start early.

No, the real reason is because people are impatient and love a good story about how someone made a fortune overnight because of a good trade on market movements. More often than not, these fortunes are made through highly speculative and risky investments, but some people have framed it from a perspective of having a combination of market knowledge and the capital to do so.

While we here at MoneySmart certainly aren’t averse to making money, how you do it is probably way more important. Growing your money for the long term is of course of priority, but does that mean you can’t take advantage of short-term market movements? Here’s where this simple product allows you the benefit of being aware of your risk, while still being able to profit from short-term market movements. What are we talking about? They’re called Binary Options.

 

Binary? Am I Investing in 1s and 0s?

No you are not, but in the same way that the 1s and 0s in a binary system represent two distinct choices, binary options are generally based on a single question with a yes or no answer. For example, it could be “Will the S&P 500 close higher before the binary expires?” If your decision to that answer is true at the time the option expires, then you make money, and if you’re wrong then you don’t. The beauty of binary options are that you can choose that time frame for expiry, and it can range anywhere from 5 minutes to a month.

Typically, if you feel that a particular binary will close higher than its current price, you would “buy” the binary, and if you feel it will close lower, you would “sell” the binary. Prices for the binary would depend on the likelihood of the particular event happening, i.e. the more likely it is for that event to occur, the more expensive it will be. Of course, there are more details related to pay outs and prices based on the broker that you purchased the binary from.

 

What is the difference between Binaries and CFDs?

If this sounds similar to trading a Contract For Difference (CFD), you’re not completely wrong. They both deal with movements in the market, with certain limiting factors that affect your trade. In the case of CFDs, that limit is the price when you close off your outstanding open positions, whereas in binaries, time is the limiting factor.

The reason for the appeal of binary options is the fact that you are clear of your potential profit and loss before you trade. Because of the fact that your gain or loss is not pegged to the absolute change in price, but just the direction in which the market moves, you don’t have to second guess how much you could make or lose.

What this also means is that in markets which are relatively flat and don’t experience huge swings, you can still make a significant amount of money, because your gain is not pegged to the price you wish to close off your current outstanding open position. This is something unique to trading binaries as compared to other investing instruments, and something that appeals to people who are partial to certain markets that don’t move as much.

 

What else should you consider?

Given the relatively shorter time frame of investing in binary options as compared to something like a unit trust, being able to trade anywhere you are definitely becomes a huge plus point. Having a mobile app that allows you to follow the rhythms of your set timescale would allow you to better make decisions and keep in touch with what is going on with your investments.

At the end of the day, as with investing in general, you definitely shouldn’t be putting all your eggs in one basket, and utilising binary options to help diversify your investment portfolio could be a smart way to grow your money both in the short term while you plan for long term growth as well.

 

This is the fourth article in an investment series sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2015). To learn more about trading, you can check out IG’s seminars. 

 

If you missed the first two articles, you can check them out here:

3 Common Myths and Misconceptions Singaporeans Have About Trading CFDs

Singaporeans Who Are Afraid of Investing Should Consider This Before Writing it Off Completely

Think That Investing is Like Gambling? This System of Trading Might Change the Game For Investors Forever

Mark Cheng

I rant and rave a lot, but when I'm not busy doing that, I'm managing the content for MoneySmart. I love Singapore, but I also believe in helping it to improve bit by bit, and that's where MoneySmart comes in. Have some thoughts? Drop me an email at mark@moneysmart.sg.

  • hansc

    Not trading at all is better than trading binary options. I do not understand they are even mentioned as a viable investment vehicle on this website.

    With binary options, any time a trade is structured so that your “broker” takes the other side of the trade, but, your broker isn’t a broker, he’s a blackjack dealer. If you put down
    $1,000 on a binary options trade has a 50/50 of winning, your max payoff
    will be something like $800.

    Even if you crack the system and actually manage to be profitable,
    your dealer will close your account because he doesn’t want to lose more
    money betting against you.

    If this is the sort of thing you’re into, just structure an options trade so that it has a binary payoff. Look up vertical spreads, butterflies, and iron condors. Or you could just buy an option and immediately put down a One Cancels Other (OCO) sell order that will sell
    the option if the price rises above a threshold, or falls below a stop point.

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