One of the most frequently asked questions about binary options trade is how the brokers involved in it actually make their income.
Many people are puzzled by this question and it sometimes leads some potential traders to presuppose that binary option trade can be a scam. Some go as far as comparing binary option trade with gambling or even “casinos.” Although, the way brokers make their income is somewhat difficult to understand it is, in no way, illegal.
Firstly because there are regulations being imposed on this type of trade and there are agencies involved which are here to protect your investments and make this trade lawful.
The thing with forex trades or the stock market is that the brokers involved in those systems make their money by charging spreads to the users or in some cases acquire their income by charging commissions.
This is in no way the case with Binary options. Although it may be difficult to some to understand the way that binary option brokers make their money, it can actually be simpler than that. There are a variety of ways this happens but the most common ones are through the pricing of the binary options and by trading activities of trades. But the precise method actually depends on the broker’s personal business model.
The pricing structures of binary option brokers are in most cases obtained by their liquidity providers. There is a slight difference in the pricings of the offered prices with the binary options opposed to those prices on the market. Some traders are actually completely unaware of this because the distinction is so slight. When trading binary options you get the number of the potential amount you are going to receive if you predict correctly the outcome of trade, but a slight percentage goes to your broker. So in this case, the broker retains a slight percentage of the trade as a type of a commission and is actually the income which the broker makes for setting up the trade for his or hers traders.
A binary options brokers can also make money through the trading activities of the clients. For example, if a broker has 500 clients who are trading binary options, and half of them choose to invest that a certain asset price will go up, or the call option, while the other half sets their minds on the presupposition that the price of the asset will go down, or chose the put option.
For the sake of the example, let’s say that all of them have invested $100. The payout ratio is set at 80 % by the broker when the trade started and all of the winners stand to earn $180 as their winnings.
The given expiration period passes and the price of the asset manages to rise over the strike price, meaning that all of the traders who have chosen the call option have won while the others who have chosen the put options did not get anything out of their trades. The total payout of the winnings which the broker has to give to the ones which have chosen correctly is $45,000, while the rest of the money invested from the losing side, so to say, the broker gets to keep as a fee.
This is of course just a mere example and would only work if the market was in balance, which often times is not, and we are only using it to closely explain to you the phenomenon of the broker gaining his or hers payout.