There are several ways that a binary options broker can make money from the traders’ investment. Legitimate brokers make money by marking up the price of the asset on the trading platform. Usually, the pricing structure of the different types of assets are derived from the liquidity provider. The asset’s price has been marked up to be slightly higher than the original market.
Binary options brokers actually make money on both in-the-money trades and out-of-money trades. For in-the-money trades, they earn a portion of the profits when you make the right prediction and win in the trade. The payout ratio displayed on the platform is not calculated based on the actual percentage on the original market so that is how the broker profit on a portion of your payout.
For out-of-money trades, the broker profits on your capital investment plus the payout rate when you make the wrong prediction. For example, if the payout rate is 85% and you place a trade of $100 on the USD/EUR currency. You predict that it will go up but the result end up that the USD/EUR currency go down.
You lose your capital investment and didn’t get any return. In this case, total amount that broker earn will be $185 including your capital investment plus the payout rate of 85%. Everyday, there may be 10 or more out-of-money trades so the broker can easily earn tens of thousands or hundreds of thousands of dollars per day. There are some brokers that offer refunds for out-of-money trades, which is usually 5% – 15% of your initial investment.
If most of the traders are winning, the broker would be losing money and close down. In truth, the majority of the trades will be losing trades for most of the time so this makes a lucrative business for binary options brokers. A survey report that was released in Japan revealed that 85% of the trader lose in their trading. Most traders are not able attain a high winning rate because they lack the patience to learn about trading binary options. Those who do spend time to educate themselves such as reading guides, watching video tutorials and attend webinar will learn how to earn a consistent income over a long term. Therefore, it is all up to you on whether you will make money or lose money binary options trading.
How Peer 2 Peer Brokers Make Money
Some brokers operate on a peer 2 peer network which allows traders to trade against one another. In peer 2 peer network, clients can create options with different types of payouts and the buyers will decide how much they want to invest and place the trade within a single click. If the buyer predict the price movement incorrectly, the seller will profit.
The broker does not profit on the out-of-money trade but they make money by charging a commission whenever the trader purchase a contract. The commission ranges from ten dollars to twenty dollars. This means that the seller won’t earn the full amount on out-of-money trade because the commission will be deducted from here. Hence, both the traditional and the peer 2 peer model are the same because the brokers will end up making the same range of income.
Another way binary options brokers make money is by offering bonus that match with their deposits. They advertise the bonus as an incentive to help new traders to get started in the trading. New traders often get tricked and assume that they will be able to withdraw the bonus from their account. There is a string attached to the bonus, and that is you need to fulfill a certain amount of trading volumes, for example your trading volume must be 30 times of the bonus, before you can withdraw them from your account. The minimum trading volume you must reach is stated in the terms and conditions .
An illegitimate broker will attempt to cheat your money in many ways for example charging your credit card for hidden fees you don’t know. This is why it is important to only trade with broker that is transparent about all their fees and lay them out upfront on the trading platform. Scam brokers will find all sorts of excuse to lock the funds in your account so that you won’t be able to withdraw the funds.
It is possible for you to consistently win in your binary options trades if you are patient and willing to spend time to learn all about it. As a rule of thumb, you should only trade with a legitimate broker that is equipped with proper licensing to avoid situation where they try to cheat your money by preventing you from making a withdrawal.