How Binary Options Broker Makes Money?
If you have the same doubt about how binary options brokers make money, you are just in the right place.
We already know how brokers tie the market and traders together. But do you know how they squeeze the essence from traders?
Yes, there are many ways to do it!
In other forms of trading, like forex and stocks, brokers receive commissions to fill their pockets. However, binary options trading is entirely different from traditional trading. So, this article will illustrate the process with the necessary examples.
Let’s flip the page.
What Is Options Trading?
Binary trading is a game of probability. The more accurately you can predict market movement, the stronger your chance of winning the trade. Many of us just throw this into the gambling category. Well, partially, it is. But entirely not.
If you follow the strategy, the market will not disappoint you. On the other hand, the trading broker will let you know the return percentage before opening a trade.
Besides, binary options is the best fit for short-term traders. However, the fear of losing money leads people to make mistakes unconsciously.
Take time, breathe slowly, and deal with it.
What Is Trading Broker?
Is that what you’re picturing?
In a fancy suit with polished boots, a computer brain, and powerful words, a winning combination for a broker. But you can only dream of such a person, or it is only possible in movies.
Now the definition of a broker has been significantly reformed.
Generally, you will get an electronic platform with lots of tools and techniques known as a broker. By providing the dashboard, they illustrate market movement and help millions of traders fill their pockets or lose money.
How Binary Broker Makes Money? - Standard Methods
Generally, legitimate brokers do not pray for your bad days.
But you may wonder how brokers fill their hats without charging traders more. Usually, there are some standard methods that brokers follow to make money. However, they also mention those charges on their websites.
- Deposit fees
- Withdrawal fees
- Over-night trading fees
- Inactive fees
Not all brokers charge deposit and withdrawal fees. However, depending on your payment method, they charge a minimal fee.
On the other hand, to motivate traders, brokers require an inactive fee if your account is dormant for a long time.
Usually, this fee only applies to traders who trade Forex or CFDs with leverage. In options trading, there is no way to trade with leverage.
How Binary Options Brokers Make Money
The types of brokers you have learned before just need a pause. Because in this article, we will focus on two types of brokers, generally we called
- Regulated brokers
- Scam brokers
Those who are with proper trading regulation, broker makes money from
- Trader’s prediction
- Welcome bonus
- Payout rate
- Trader to Trader binary exchanges
- Price discrepancies
Let’s take a look at how regulated binary brokers make money.
1. Trader's Prediction
To win at binary options, one needs to predict the proper market movement. And it is the game you need to play attentively. You will lose your capital if the trading chart moves differently.
That means a trader will lose money if his prediction turns out wrong.
Additionally, you won’t get any compensation for your losing trade.
- If a trader makes a loss, the broker profits.
- If a trader makes a profit, the broker loses.
2. Payout Ratio
The most common way brokers earn profits is when someone makes a correct prediction and wins a trade.
Do you know how they calculated the payout ratio?
Suppose you invest $500 in 60-second binary options on the EUR/USD forex pairs. The payout ratio is 95%, and if you predict correctly, you will get $975. Besides, if you miss the train, you’ll be empty-handed.
So,
The initial investment of $500 + $475 profit = $975
However, the payout ratio visible on the platform is not calculated based on the actual market price percentage. And this way, trusted options brokers make money without any scam move.
3. Trader To Trader Trading
It is another method that you can consider in a peer-to-peer trading environment. In this method, one trader trades against another trader instead of trading on the open market.
In this network, if one party predicts incorrectly, the other party will make money.
So, the broker will charge a fixed or variable percentage as a commission. So, the trading form is slightly different from the traditional trading method. However, no matter which trading form you apply, the broker will make money at the end of the day.
4. Welcome Bonus
You are all familiar with the term welcome bonus. It is one of the most appealing cursors to make an impression on traders. The fun part is that you won’t be able to withdraw the bonus amount.
On the other hand, you need to deposit a certain amount to get the bonus.
5. Price Discrepancies
You are probably dreaming if you think options trading asset prices are similar to the financial market.
Time to wake up, dude!
The binary options asset price is slightly higher than the market. As a result of the price discrepancy, the brokers fill their pockets with profit.
How Do Scam Brokers Make Money?
Meanwhile, scam brokers often create a puppy face to impress you with lucrative features. They promise you fake returns. Instead of helping traders, they focus on scamming them.
It’s nearly impossible to tell which broker cast the widest net for the biggest catch. Scam brokers usually come up with lucrative features and disappear. They create an environment that forces beginners to grasp everything in both hands.
Even they manipulate people with software that generates fake returns. You will return empty-handed, though initially, everyone can make money.
Lastly, they will lock your funds by making lame excuses.
And this is how they make money playing a cheap shot.
Conclusion
Each broker has different policies. Yet, most are regulated and try to maintain a transparent environment for traders. Check the rule book and the regulation page to find out whether the broker is regulated or not.
Knowing how your broker makes money is essential to figure out which one is the perfect platform for you.
On the other hand, making money or winning trades is highly possible with binary options. All you need to have is a clear head and a focused mind.
