It is quite hard to understand how do binary options brokers make money. Brokers usually earn through commissions or spreads but binary option brokers work differently. After few heavy financial strikes to the economies around the world as well as the popular scams in binary option trading, everyone knows that binary options brokers are making good money.
How? Let’s find out.
What do Binary Options Brokers Do?
Their job is simple. They just have to understand their traders and offer them a good return on investment. Brokers exist and manage to make money more than traders because no one wants to learn the proper binary option trading.
In simple words, when a not-so-good-at-trading trader loses money, brokers keep it. That’s why brokers in binary options hardly charge any sort of fees from their clients.
The two methods on which binary option brokers rely are:
Pricing of the Binary Options
Liquidity providers are the main source of having pricing structures for binary option brokers. The pricing in binary options on which traders trade are on a little higher side from the prices of the market. Generally, traders are unaware of this fact.
We check asset prices on these trading platforms and always expect the payout in dollars and cents, however, we miss the point that it was not calculated as per the actual percentage payout. Broker retains a certain amount from the actual payout and this is the most common commission of binary options brokers.
By tracking the trading activities of the clients, binary options brokers have a great chance to increase their earnings. Let’s explain it with an example where a binary options broker holds 500 clients.
Now, let us assume that half of them think that GBP/USD will increase in the next hour whereas half of them think that it will fall down in the same period. If 250 of them bet $100 each on its fall and 250 bet $100 each on its rise, then total money in the market will be $50,000.
If the GBP/USD came up with an 80% paid out ratio and after an hour ended up, all those 250 clients with money on the rise will have $180 each whereas other 250 will have zero return. The total payout will be $45,000. The balance of $5000 is what broker earned.
Honest and Dishonest Brokers
Of course there are honest and dishonest ways to make money, just like there are honest and dishonest brokers; let's take a look at the differences between the two.
Licensed, regulated, accredited, an honest broker generates money from the trading volume. A report of binary options trader data from Japan in 2014 showed that there were 85% traders losing their money.
Luckily, still 15% managed to turn a profit. It is traders' money supports licensed brokers; the two above mentioned methods are also used by honest brokers.
Another way to brokers make money is by giving their traders a bonus. Offering traders “bonus money” is an old effective trick for which still few new traders easily fall for. When a trader starts trading, brokers offer them bonus money to get them started trading.
For the most reliable binary options brokers, read our review.
Dishonest brokers have more than enough ways to fool traders. These brokers will offer you help in making money and will get your permission to trading on your behalf. They will show your trades as winners by manipulating the software.
Disreputable brokers will offer you a bonus to lock your deposited money so that you cannot withdraw it. There will be unauthorized charges placed on your credit cards.
Everything will be fine until you ask broker to withdraw the deposit. It is nearly impossible to get money from a scam broker. There will be certain trading opportunities pitched to you in order to stop you from withdrawing the money.
It will be all done manually by a clerk who will ask you tons of questions first. Then will ask you for several verifications and paperwork. It will all end up with no money for you.
There are always small commissions on certain things like purchased contracts, accounting management etc. And at times, traders forget about the interests on their deposits which is again brokers money to take.
Above examples show that there is a balance in both the virtual and real world of the market. However, on both the sides, brokers are easily earning their livings out of traders money.
To learn more you can watch this YouTube video:
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