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What is a binary options broker?

To enter the world of binary options trading, you first need to find a broker. 

A broker is a company or individual that effectively connects buyers and sellers of different underlying assets so that they can trade with each other. In this way, the broker acts rather like a middleman or an agent.

The binary options broker’s role

Think of financial markets as a street market selling everything from fruit and vegetables to clothing and electrical goods and of the binary options broker as an individual stall holder.

You want to buy some apples but it makes no sense for you, the customer, to drive out to a farm every time your fruit bowl is empty and negotiate a price with the farmer. At the same time, it makes no sense for the farmer to make thousands of tiny sales to individual apple eaters. So you seek out a stall holder with a good stock of apples who has already agreed with the farmer how much he will pay for them and has decided on a price he will charge you. He deals with both the farmer and the consumer and allows trading between the two of you to take place. 

How do I interact with a binary options broker? What do I do to trade?

When you trade binary options, your contract is with the broker. 

Most binary options brokers now allow you to trade over the internet, using their trading platform. 

In this case, you place all your trades through the broker’s trading platform, using it for everything from monitoring price changes in a variety of underlying assets or checking the balance on your trading account to picking what kind of binary option you want to use and executing the trade. 

Depending on the broker, the trading platform can take the form of trading software that you have to download or a web browser that can be used from any computer. Most brokers also offer binary options apps for mobile phones and tablets so you can trade on the go.

How to choose a broker

The binary options available to you – including their type, their expiry times and the assets underlying them – will vary depending on the broker you choose. 

Different brokers are also free to decide what size payout or return is written into the various options contracts they offer, as well as the size of your initial outlay. 

It is therefore important to shop around so that you find a broker that suits your trading style.

For example, traders with a big risk appetite may prefer brokers that offer binary options that carry greater risk but offer bigger payouts when the trader wins, such as touch options. 

Traders who enjoy fast-paced, short-term trading may look for brokers that offer contracts with very short expiry times. Traders who have an interest in or knowledge of specific asset classes such as commodities or currencies may want to check which of these a broker offers.

It is also vital that you check who the broker is regulated by. However uninspiring the title, be sure to read the next section of this lesson!

Broker regulation

In many countries, binary options trading is not regulated the same way as other forms of financial trading. 

In the UK, for example, binary options are currently classified as ‘fixed odds bets’. They are therefore not regulated by the Financial Conduct Authority (FCA) but by the Gambling Commission. And if the broker does not have any gambling equipment located in the UK, they are not even regulated by the Gambling Commission. 

Many binary options traders using a UK-based broker do not therefore enjoy the same level of protection as, for example, spread betters, whose activity falls under the auspices of the FCA. Client money is not necessarily kept in a trust account and transactions are not monitored by third parties. 

This may change. The UK Parliament is currently considering reclassifying binary options as a financial instrument, meaning they could eventually be regulated by the FCA.

In Cyprus – where a number of binary options brokers are registered - binary options are now classified as financial instruments and are regulated by the Cyprus Securities and Exchange Commission (CySEC). 

In Malta, they are regulated as a financial instrument by its Financial Service Authority, meaning brokers registered there have to conform to minimum capital requirements laid out in the EU’s Markets in Financial Instruments Directive.

In many other countries however, binary options continue to be unregulated. 

Great care needs to be taken therefore when choosing a broker. There are a number of very reputable binary options brokers out there but also some unreputable firms. 

Check thoroughly the credentials of any broker you choose. Their website should show where they are based and who they are regulated by. Also, run an internet search of the name of the broker you are considering using, ideally under your search engine’s 'News’ category. This should help you find out if the broker has been the subject of any investigations or disciplinary action. Finally, trading forums can also be a great source of information – ask other binary options traders which broker they use and what their experience has been like.

Summary

So far you have learned that:

  • in order to trade binary options you will need a broker
  • binary options are traded online via the broker’s trading platform
  • there are all kinds of trading platforms to suit traders’ needs including: desktop, web based and mobile platforms
  • there is no simple answer which broker to choose, the right broker may depend on what type of trader you are
  • regulation is crucial and that tradimo only advertise regulated and trustworthy brokers for your safety

 

Becareful: European Union bans binary options!

Markets.com

Markets.com
Minimum Deposit$100
Average Spread2,2 pips
RegulationCySEC, FSB
Founded2010

Why

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eToro

eToro
Minimum Deposit$200
Average Spread3 pips
RegulationFCA
Founded2008

Why

Get 12-month Premium Membership for free. Deposit and send us an email to premium@tradimo.com to claim your free Premium Membership.

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