Binary options trading is a very popular way to make money and that is why more and more new brokers appear every year. Brokers' earnings are based on traders who are clients of the company. But how exactly do binary options brokers make their money?
If you decide to make money trading binary options , you should first define the terms. So, a broker is an intermediary in performing exchange transactions; trader – anyone who decides to trade in the financial market; spread is the difference between the selling price of a product and the purchase price, usually measured in points; binary option – the ability to make financial transactions with shares and make a profit; Finally, a swap is an extension of the transaction period.
Those who are just planning to start learning how to work on the stock exchange may initially doubt the integrity of the process, as well as its profitability. Let's look at the income options of a broker and trader to get clarity on the system for generating income on the stock exchange.
Broker and trader income
The trader receives income if he gives a correct forecast of the price movement in the near future and purchases the necessary option. Everything seems to be clear here. The process of generating broker income is a little more difficult to understand. The basic, classic option is similar to the principle of operation of a currency exchange office, where from each exchange or purchase operation, the currency exchange office receives the difference between the purchase and sale prices. If your exchange office is located in a busy place, then the profit percentage will be quite high. Brokers work according to a similar scheme and also make a profit from the spread, usually it ranges from 3 to 10 points. To participate in trading, you, as a trader, will have to first buy a currency and then sell it, or vice versa, which means the broker will receive his share of the income. At the first moment after purchasing shares or currency, you may notice that the possible profit is -5 points - this is the cost of the spread. An ordinary broker is not very interested in clients receiving income; for him, his main goal is the largest possible number of completed transactions and the constant replenishment of the team of traders. To keep traders active, the broker can offer all kinds of trainings, advice, bonuses and a lot of other promotions that will retain existing clients and attract new ones, as well as stimulate transactions.
Spread and swap
Typically, binary options brokers do not ask to pay the spread, but if your broker takes money for such a service, then it is better to stop cooperation, this will not end well. Sometimes brokers may also require payment for rolling positions over to the next day, i.e. a swap fee. Such a requirement is a sign of a novice broker, since experienced and large brokers do not ask to pay for such actions.
The broker may receive some benefit in the form of a commission for depositing and withdrawing amounts. The trader, of course, does not welcome such expenses, but the broker is sometimes simply forced to pay a commission percentage in the system with which funds are exchanged. Of course, neither the spread fee, nor the swap fee, nor the commission for withdrawing and depositing funds can be sufficient income for a broker. So how do brokers make their income?
There are two types of brokers: brokers who work as brokers and real brokers, so to speak, true ones. Depending on the type of broker, their income varies.
Brokers-bookmakers
In reality, many brokers cannot be called real intermediaries; in fact, they do the work of ordinary bookmakers. The difference is that they do not carry out client transactions on the market, but earn money on the margin between the percentage of successful and losing transactions. Such a broker is not concerned with the question of how he will make money. The main thing is income. Some brokers choose this option for making a profit for several reasons.
The first is price charts that change all the time. Exciting sporting events that could generate income are much rarer.
The second reason is the eternal belief of new traders that they will get lucky right here and now and do not need to know anything for this. This approach is reminiscent of playing in a casino, where it seems that anyone can win a million. Naturally, this approach is fraught with numerous losses, and these losses allow the broker-bookmaker to earn a good income. If you are offered to buy an option with an expiration date of 5 minutes and promise a price movement on it by 1-2 positions, do not agree. It is almost impossible to accurately predict for such a period of time, which means you will lose and the broker will receive income from such a transaction, but not you.
This cannot be said that such a broker-bookmaker is definitely bad; he may well play honestly: pay you your winnings, and in case of failure, legally take your money. But still, this cannot be called a serious approach to working on the stock exchange. There are no direct signs of such a broker; outwardly everything looks quite good. But you can still find some features that indicate a broker-bookmaker.
For example, very often it is impossible to get part of the money from such brokers if you lose. For them, this is an extremely unprofitable expense column. Having studied the website of such a broker, you can find a lot of information for actively attracting new clients, in addition to many promises of quick and easy income. Beginners, who are attracted by such promises, can earn much more money from their mistakes than experienced professional traders, who are quite capable of ruining a broker. Another sign of a bookmaker is that they offer an affiliate program on very favorable terms, in other words, they recommend that you search for new traders instead of trading. For a real broker, experienced and knowledgeable traders are very valuable and he will not switch you from trading to something else. To actively attract new clients, the broker-bookmaker will also always offer the lowest possible starting amount, the smallest deposit amount, etc. Thanks to all these actions, such a broker can earn quite successfully, because the proportion of successful and failed transactions is 4 to 6, or even less.
Real brokers
A real, real broker operates with the money of his team to carry out transactions on a specific market. If you bet on an increase in the price of platinum, such a broker will work on the commodity market, for promotional games the broker will enter the stock market, and for concluding foreign exchange transactions the broker will work on the FOREX market.
It is more convenient for brokers to work with binary options, because at the very beginning you give your finances in the form of the full cost of the option. The minute an option is purchased, a certain amount leaves your account. At the end of the option period, your account will be replenished with the initial amount plus profit, or the account will remain in the red or at zero, compensating for the loss. For successful trading, a real broker needs the funds that he receives from his traders. And already having the required amount of funds, the broker has the opportunity to carry out a serious transaction with a high probable profitability. The broker often makes the decision to carry out a particular purchase or sale transaction together with experienced traders on his team.
In the case when the broker made the right decision and won, he shares the income with those players who also correctly indicated the price step. Naturally, there are few such experienced traders, less than half of the total number of players. The funds of traders who made a mistake remain with the broker. The profit on a solid trade is often so high that the broker may even pay some compensation to losing clients.
If the broker ends up losing, then he loses less money than when making a successful transaction. In this scenario, he pays the winnings to those who made the correct prediction and accepts money from the losers. An experienced broker always takes into account different scenarios and plans work in such a way that in case of failure, the loss is covered by the funds of the losing players. Thus, we can conclude that a broker working with options has very profitable working conditions, because he has a constant “gold reserve” - no matter how the situation develops, there will always be losers, whose money will serve as compensation for the broker in case of failure .
There are several other ways that enable a broker to make a profit. The first technique is a recommendation to make a one-touch transaction, that is, One Touch options. For example, the broker plans to bet on the price rising to 2.50. He recommends to his clients to bet that the price will rise to 2.65. Even if you lose, the broker will take the entire amount without any obligation to compensate.
The second technique is to play both ways. In this case, one position is opened to sell, for example, a ruble, and another to buy it. Whatever happens, one of the transactions will bring profit, and the loss of the other will be compensated by the funds of the losing clients.
A sign of a real broker can be constant offers to place large bets. The higher the option price, the more assets the broker can purchase or sell. Also, real brokers constantly update the list of options, and based on the content of such a list, one can judge the broker’s work plans.
Conclusion
Which type of broker to work with is up to you. The main thing for a trader is the presence of acceptable working conditions: fair terms of the transaction, timely payment of profits, as well as the absence of unexplained write-offs and unspecified commissions. Good luck with your transactions!
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