Binary Options Glossary
Binary Options Glossary
If you’re new to the world of binary options, there are going to be a lot of things to learn. One of the most important is going to be the new vocabulary that you’re about to start using. As with any trade, art or craft, binary options trading has its own special terminology, and without understanding what these new words mean, you’re not going to be able to trade—and profit—effectively. So to help get you started, we’re going to introduce some of the basic terms that you should know going forward as you enter this new world of trading and investment.
This is the sector of business where people who are interested in owning a “piece” of a company like Apple, Google, Toyota or any of the other big corporations can do so. To own a piece of a company, you need to buy stocks in that company, with your proof of ownership being the share certificates. If you own a high enough percentage of stocks in a company, you can even control some of the company’s activity to an extent, as you are allowed to sit on the “board of directors” that determines how a company will do business.
For most people however, buying stocks in companies is similar to the real estate practice of “house flipping,” where people buy a home not with the intention of moving in and taking up residence, but to renovate it and then sell it off again at a higher price in order to make a profit. Most people buy stocks with the intention of selling them at a higher price.
The commodities market is the oldest market in the history of business. This is where actual materials and goods required to keep civilization progressing are bought and sold. Everything from the wheat we need for food, to the oil we use in processing to gasoline for vehicles to the gold we use for jewelry is a part of the commodities market.
While the majority of trade in the commodities market is for actual businesses to use, such as steel manufacturing companies selling that steel to construction companies that require it for building, some investment similar to the stock market plays out here as well.
Foreign Exchange Market
The “Forex” as it is known in short form, is the global marketplace where currencies are exchanged and traded. When people or companies need to buy and use American dollars or Japanese Yen, this is where it happens. But the Forex is also a place where, as with stocks and commodities, investments and trades can be made on the currencies themselves in order to make a profit. In some instances, this is similar to the other forms of trade. An investor will buy a currency at one price, then re-release it back onto the market when the price rises higher in order to make a profit. But there are other ways to make money here as well.
This is the basis of what binary options trading is all about, and it is what differentiates it from traditional trading and investment. The old way of doing things involved buying an asset and selling it again at a higher price. Speculative trading however, which went into widespread usage in the Forex market, is about placing money on the outcome of a price movement.
In this regard, it’s similar to a bet. Instead of buying shares of a company like Amazon, a speculative trade in binary options predicts that the price of the stock is going to go up. If that prediction is correct, the trader makes money. If the price moves down, and the trader is wrong, the money is lost.
This is the “topic” or “subject” that you will making your binary options trading with or against. If you are making binary options trades on the stock price of the McDonalds fast food corporation, your asset is McDonalds stock. If you are trading on the British Pound/American Dollar currency pair, then those currencies are your asset. If you are trading on the price of gold in the commodities market, then gold is your asset.
In binary options trading, this is the option you purchase when you believe that the price of an asset is going to go up. If the final price of the asset actually does move up beyond the current value, then your binary options trade was successful, and you will make a profit.
This is the trade you make on an asset when you believe that the price is going to drop. So if you hear about a corporate scandal with a noted automobile manufacturer, or tech company, there’s a good chance that a loss of confidence will result in a drop in the stock’s value. A put option taken out against that asset’s value can lead to a profit if the price actually does drop.
The expiry is the timeframe a trader designates for a trade to take place to see whether the prediction about asset performance was correct or not. You can’t just make a call or a put trade and wait until the price moves in your desired direction, claim a “win” and collect the profit. You must specify a trading period and see whether your prediction comes to pass within that timeframe.
At The Money
A “zero net” situation. This means that you made a call or a put trade, specified a price point that an asset would rise or fall to, and, at the end of your expiry date, the final closing price is exactly what you predicted, no more, no less. In this instance, a trader doesn’t lose money, but the trader doesn’t make money either.
In The Money
A profit situation, where the closing price at the expiry exceeds what the trader specified as a price point. So if a trader predicted the price of an asset would drop below $25, and the final price was $24.50, the prediction was correct, and the trader profits.
Out Of The Money
An incorrect prediction. If a trader predicts that the price of stock will rise above $30, but it closes at $28 instead, the trader was wrong. Whatever initial investment the trader made is now lost in this particular trade.
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