The question has been asked many times about binary option trading, is it gambling or investing?
The answer is quite simple. It all depends on you!
Comparing Trading to Gambling
When naysayers compare binary options to gambling, they are missing a major fundamental difference. In the casino, the odds, depending on the game, are 48% player versus 52% casino. Roulette, Blackjack, and Slot Machines are games of chance and not skill.
With binary options there are outside forces like market events which cause the movement in price. Market traders, who are experienced traders, know when the odds are in their favor, and when the odds are against them. If you look at the floor of the Chicago Mercantile Exchange you will see many people who are trading as a profession.
Many people who think it is a 50/50 gamble don’t understand why a binary options broker will only offer a 75% return on a $EURUSD binary option. If it is 50/50 then the return should be closer to 100%. The fact is that it is not a 50/50 chance. There are many brokers who have gone bankrupt because they could not payout their traders.
Investing or Gambling
Is investing in the stock market gambling? Wall street has managed to convince the entire world that the smart thing to do with your money is to give it to a stock broker, so that he can gamble it for you.
The reason binary option trading is not an investment, is because of the time frame of binary options.
Take real estate investing as an example. When a person buys a an apartment building as an investment. Does the investor plan on selling the apartment building in two weeks or in 20 years? Of course the investor will hold onto it for at least 5 years. You will never find a real estate investor buying apartment building to sell next week. This is why people call real estate gamblers, investors. The owner is gambling on the property, but it considered an investment because it will be held for a long time.
When it comes to trading stocks, commodities and Forex, there are also time frames. Swing traders enter positions for anywhere from 2 hours to 2 months. Day traders close all their positions before they go home at the end of the day.
And there are the stock market investors who made an “investment” in EToys in 1998 and planned to hold it for 20 years, but the company bankrupted.
Trading stocks is very risky, although society considers it an acceptable way to make money on your savings. Trading options is even riskier because of time decay. Trading binary options are riskiest because of their short expiration times.
Regulation of Brokers
Many binary option brokers are not regulated. When using a unregulated broker you are gambling that they will actually let you withdraw your money. Read more about that here.
However, there are a handful of broker regulated by CySEC, see list here. The brokers regulated by CySEC are considered financial institutions in Europe and have rules and regulations they follow. The reason why these brokers are not regulated by the CFTC or SEC in the United States has to do with a technicality.
The CFTC has a problem with “brokers” or “dealers” who take the other side of the trade. Remember during the financial crisis in 2008 when Goldman Sachs and Bear Sterns got into trouble with regulators for selling mortgage backed securities to their clients. The problem was that as Goldman Sachs was selling these products to their clients, they where short selling them to make a profit. This means that when the client loses money the broker makes money. The CFTC wants to see an open exchange for traders to have the ability to not only by binary option puts and calls, but also have the ability to sell binary option puts and calls.
In binary options trading, when the trader loses money, the broker makes the money.