Investing

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binary options trading

Binary options are also called digital options and as their name implies, have only two possible outcomes for each trade.  A position can either expire in-the-money and you win that particular trade gaining as high as 80% returns or expire out-of-the-money and you lose the entire money invested on that particular trade.

If you are looking to understand the concept of risk to reward ratio as a beginner, it can be defined in simple terms as the potential return versus the probable loss for every single trade executed by you. For instance, a 1:2 risk to reward ratio means that if you succeed the trade you can earn double the amount of money when compared to the amount you may lose if your trade is unsuccessful.

The Growth of Binary Options Trading

Binary options trading is a relatively new investment method which has grown by leaps and bounds in the last few years due to its overwhelming returns and limited risk. In other trading methods like spread betting, futures contracts or spot forex trading which support leveraging, the risk/reward ratio can vary based on the potential returns, leverage factor and borrowed amount.In margin trading, the returns can be much higher but at the same time risks are also substantial and traders use techniques like stop-loss orders to limit their risk.Ideally, professional investors will advise you to look for investment options which offer a risk to reward ratio of 1:2.

The biggest advantage of binary options is the fixed risk/reward ratio which means you will know how much money you can earn or lose before placing the trade. The important reason for the popularity of binary options is the limited risk, which means you can never lose more than the amount you had invested in a particular trade. Also, you can make profits with binary options trading even if the market is bearish and your assets are having a downtrend by choosing “Put” option.

The payout percentage promised by your broker is important to determine the risk/reward ratio as it can vary between different brokers.Hence you should always choose a reliable and trusted who offers high payouts of at least 80% like anyoption UK. For example, let’s assume you invest £100 in a trade where you bet against GBP/USD currency pair and the payout offered by your broker is 70%. Then it means you will get £70 profit if you win that trade and lose £100 if your option expires out-of-the-money. In this case, the risk/reward ratio for that particular trade is 1/0.70.

The Win/Loss Ratio

Apart from risk to reward ratio, you should also understand the concept of win-loss ratio or success rate which refers to the chance of winning a particular trade. Success rate is usually calculated based on past performance and expressed in terms of percentage. In simple terms, it is calculated as the number of winning trades divided by the total number of trades taken over certain fixed time period. If your success rate is 60%, then it means you are expected to win 6 out of 10 trades you execute.

So as a binary options trader you should consider both your success rate and payout offered by your broker in order to determine the exact risk to reward ratio. Most of the binary options brokers try to attract traders by promising unrealistic payouts and quoting high returns in terms of percentage which highlight only the positive side of these options contracts.

But in reality, if a trader loses 50% of the trades he executes, then he will lose 100% of his investment in all these trades unless the broker offers any refunds for lost trades. Hence the potential risk is 100% of your investment while returns can range from 60% to 90% depending on the payout offered by your broker. To explain in simple terms, binary options don’t even guarantee a risk to reward ratio of 1:1.  Some brokers may offer refunds up to 25% depending on the type of trade you execute. You should choose such a broker who offers guaranteed refunds for lost trades as well in order to improve your risk to reward ratio.

An Example In Action

Let’s take a simple example to understand the risk-to-reward ratio of binary options. Let’s consider your broker is offering a payout of 80% for every trade you win and your success rate is 50%. For simplicity, let’s assume that you are investing £100 in each trade and you are executing 100 trades in a month.  So, you would have invested an overall amount of £10,000 in a month and you have lost 50% of the trades which means you have lost £5,000 from your capital. For every successful trade, you would have got £80 as a return which means you have won £4,000 (Assuming you won 50 trades out of 100, each offering a return of £80 = 50 * 80 dollars).

After consolidating both, you will be surprised to know that you have lost £5,000 from your investment capital of £10,000 and your returns for successful trades are only £4,000. So overall in this example, you have lost £1, 000 from your capital and you don’t have any positive returns.  In reality, a success rate of 50% is even considered high in binary options trading as most traders are known to lose 80% of the time. Since the payouts are fixed, you can only focus on increasing your success ratio in order to maximise your returns.

It is important to understand the risk to reward ratio in any form of trading to come up effective trading strategies. You should consider all the factors including your success rate, trading strategies, payouts and rebates offered by your broker etc. to have a clear picture of the risk to reward ratio. Understanding risk/reward profile of binary options is very crucial in formulating your trading plan and to become a successful investor. 

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Spread betting is often dropped casually into the traditional investment mix along with trading stocks and shares. However, there are some key differences in the process of spread betting which really differentiate it’s offering. If done right, spread betting is one of the quickest ways for the private investor to cash in on market speculation and allows you to use your financial hunches to reap some healthy rewards!

As with traditional investing, spread betting requires a great deal of research and analysis in order to source your opportunities. However, there are some important differences between spread betting and investing in the traditional stock market. Here we have outlined 5 key points of difference:

1. You Don’t Ever Own Any Shares

Spread betting involves making a hypothesis on the movement of an asset and placing a bet on the direction you think it will go. Therefore, unlike investing in the stock market in the traditional way, you will never actually own the asset or shares you have chosen. This in turn affects your cost of entry as you will not be incurring the same trading costs as you would when buying a share.

2. Spread Betting is Tax Free

As spread betting is technically classed as gambling, then providing that spread betting isn’t your sole form of income then it’s completely tax free which means your profits wont be cut by capital gains tax or stamp duty. Additionaly, unlike investing spread betting does not incur a transaction charge when you ‘cash out’ therefore this means that your not losing out on any of your winnings.

3. Long or Short

A major difference between investing and spread betting is that the latter allows you to profit when the market is down. Spread betting allows you to ‘go short’ which means that you are essentially betting that the company or share will decrease in value. Providing that you predict this correctly, this means that one mans’ loss is another mans’ gain!

It is worth noting that there is a large element of risk involved in spread betting; your loss potential is unlimited as you cannot set a stop and your losses aren’t limited to your stake.

4. 24 Hour Access

When investing in the stock market the traditional way you are restricted to the opening hours of your chosen stock exchange, for example 9:30 – 16:00 for the NYSE. This can make it tricky if you have a 9-5 job and want to check your stocks during the day. However just like other forms of ‘gambling’ spread betting allows you to trade 24 hours a day 7 days a week. This means you can carry our your bets from the comfort of your arm chair after a hard days work.

In fact looking over your spreads has become much easier in recent years with the introduction of spread betting trading platforms which provide easy access to your research and allow you to place a bet from a laptop or even through a mobile app. One example of this is the CMC Markets trading app where you can quickly view their live market calculator and even receive notifications on your current trades so you know when to ‘cash out’.

5. You Can Bet On a Whole Range of Markets

Unlike traditional investing, spread betting allows you to bet on a whole range of markets including bonds, interest rates and currencies. However, one of the most popular forms of spread betting is actually sporting events.

Thinking of trying it out as an additional source of income? Spread betting is an interesting experience as things can move quickly when betting on the movement of an asset. With this in mind I recommend starting your adventure with paper trading or opening a demo investing account on a reliable platform to get to grips with the process before investing your funds.

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Way too often, we look at the term “investing” as a universal description of financial planning. Speaking in a strictly literal sense, it’s true. Investing means putting money into an asset or venture in the hopes that it will grow into more money over time. But when we talk about investing strategies and tendencies, it become more important to recognise just how many different kinds of financial growth efforts fall under the umbrella of the term. So what kind of investor are you? Let’s look at some of the most popular types there are.

1. Long-Term Market Investor

This is probably what most people think of when they think of “investing” in a broad sense. The idea here is to buy up stocks to create a portfolio that you will manage continuously over the course of years or even decades. That doesn’t mean you hold the same stocks that whole time, but the idea is to aim for long, gradual gains and to minimise short-term risks. This article about why diversification in investment matters actually recommends that long-term investors buy into different markets (stocks, bonds, cash, etc.), but even within a pure stock portfolio diversification is important for a long play. You’ll want a hand in different, unrelated stocks and industries so that if one goes south you lose less. There’s a greater chance of a net gain over time.

2. Day Trader

The term “day trader” is sometimes misunderstood, because even a long-term investor might keep an eye on stock movements on a day-to-day basis. But a true day trader as the term is meant to be understood is someone who regularly buys and sells stocks within a single day or a matter of days. It’s a style based on short-term outlooks and an attempt to capitalise on the smaller fluctuations that take place constantly in the markets. To some extent this type of investment relies less on diversification and more on quick action, chart analysis, and an up-to-date understanding of relevant news. If you fancy yourself a day trader, you’re essentially making investing an occupation, or at least a side job.

3. Mutual Fund Investor

“Mutual fund investor” is almost an oxymoronic term, in that if you’re using a mutual fund you aren’t directly doing any market investing. You’re really just investing in the fund itself. Still, for a lot of people this is ideal. This list of benefits from mutual fund investing pretty much clarifies why this is the route many personal investors choose to go, but to summarise; these funds reduce stress and personal accountability, emphasise diversification, and can be managed with ease. You’re essentially just giving money to a professional fund manager who will then pump that money into an existing, diversified portfolio that’s inflated by size thanks to the investments of others. That professional will handle the account until you wish to withdraw your money.

4. Forex Trader

Some investors choose to forego the stock market altogether and instead look to the currency trade, which has its own perks and benefits. This guide to how forex trading differs from stock investment explains that convenience and simplicity account for a lot of the appeal of the forex market. Basically, if you’re a currency trader, you can buy and sell currencies 24/7, as opposed to simply during open market hours. You can also capitalise on the currency market’s incredibly high liquidity (which means you can execute trades efficiently) as well as the fact that only a small handful of currency pairs make up the bulk of the market (meaning there are only so many assets to keep track of). There’s risk, as with stock market investment, but many find the convenience appealing.

5. Bond Investor

Many equate bonds to stocks and while the two are vastly different they’re often handled by the same investors looking to diversify their portfolios. The best way to think of a bond is that it’s essentially a loan agreement. When you buy a bond you’re lending your money to the company at hand, with the promise that it will be returned with interest at a given point. The appeal of bonds is that they’re generally low-risk, provided you buy from a reliable company (or government). However, they’re also lower return than many other forms of investment, which means it’s essentially a low-risk low-reward venture.

6. Alternative Markets Investor

Finally, there are also alternative investors that would rather try to grow their money in ways that don’t involve any sort of traditional financial market. This can mean any number of things such as investing in new businesses, buying up real estate, buying commodities and precious resources, and more. Each option has its own set of potential risks and benefits, though some find the idea of alternative investments in general appealing because they can be approached in a somewhat more leisurely manner.

These pretty much cover the main ways in which people try to grow their finances. And understanding the benefits of each idea and the differences between them can help you to determine just what kind of investor you are, or want to be.

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A debt-free life is one so many of us crave. The perception of being in the red, and the stress that comes with it, makes it a territory so many of us avoid at all costs.

Unfortunately though, being in debt is a reality that escapes precious few, as, despite stable inflation and recovering wage growth, we currently face crippling costs of living in the UK.

Yet are loans necessarily the suffocating financial straitjacket they are often made out to be? Or can they be an enabler, broadening the limits of the age-old cliché of ‘living within your means’?

Certainly, the merits of borrowing money to fuel rash spending are hard to come by. But the truth is that the market for credit is as diverse and consumer-friendly as it ever has been, and both businesses and individuals are using loans for the greater good, and to proactively take control of their finances.

So When Can Loans Make/Save You Money?

Debt consolidation loans are one example which is growing in popularity; the principle of which is simple yet effective. By taking out one sizeable, low-cost loan to pay off all your outstanding debt (including costly items such as credit cards), you can save a fortune in interest each month on your debt repayments. In addition, no longer having to juggle different lines of credit, with different repayment amounts and different repayment dates is a significant stress eliminator. The Guardian’s debt consolidation calculator works out whether or not this would be worthwhile.

In addition to consolidating debt, loans for things like home improvements and career development can add value, while even borrowing for things like dream holidays is having a positive impact on ordinary consumers’ lives without leaving the scars of debilitating repayment plans in the long run. Rather, in a borrower-friendly climate, the shackles of a monthly budget are no longer the sole dictator of what you can and can’t afford.

The Value of Peer-to-Peer Lending Platforms

So where to find this low-interest, golden goose of a loan? You might be surprised to find that it actually isn’t all that difficult. One look at a price comparison site demonstrates how the landscape of consumer finance has changed. The dangerously overpriced payday loans lenders no longer holding as much weight. Instead, alternative lenders such as peer-to-peer (P2P) platforms have come to the fore to offer affordable and convenient loans.

Such companies generate their value through the direct matching of funds from consumers willing to lend their money with those folks seeking a loan. Cutting out the intermediary from the equation means that the lender benefits from a return courtesy of repayments usually in excess of 5%, while the borrower pays off the loan at an APR not too dissimilar from this aforementioned figure.

Furthermore, P2P lenders pride themselves on convenience and efficiency, with it needing just two minutes of a loan applicant’s time to complete an online application form. A decision on approval is then sent within a working day, and, if affirmative, you can expect the funds in your bank account almost instantaneously.

These loans typically offer a good degree of flexibility too, with the option to borrow anywhere between £1,000 to £25,000, and a choice to pay it back over a period ranging between 1-5 years – whatever suits you best. And some platforms like Lending Works even permit you the opportunity to make overpayments and early settlements at no extra cost. Indeed, other than a once-off nominal admin fee, no reputable P2P lender is likely to have any sneaky fine-print or hidden charges.

Of course, it goes without saying that not having to turn to credit to fund all the ventures highlighted above is prize number one. But while a debt-free existence is the primary aim, the point to take note of is that debt need not be the intimidating spectre it is often made out to be.

So if getting a loan is an absolute necessity, don’t be afraid. Just be sure to do your research, so that you find the best possible deal in what is an increasingly competitive, budget-friendly market place.

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When investing online, there are a number of reliable avenues to make a good profit whilst minimising your risk:

1. Trading Stocks

Stock trading is one of the most traditional investment techniques where you can minimise your level of risk. To do this you should invest in a diverse portfolio of stocks ranging from small-cap to multinational companies. A good rule of thumb when starting out is to only invest in companies who consistently perform well over a number of years – this is much more reliable than looking at the number of months.

You should open trading account with a reliable broker to ensure that you are not charged any hidden fees or commissions. Carefully monitor the market trends and devise a clear investment strategy before purchasing any stocks. You should also watch the financial reports of the company and evaluate its profitability before buying stocks of that company.

For more investment tips, be sure to read the Naked Trader by Robbie Burns – you can see my review of his book here.

2. Forex Currency Trading

Another approach is to trade Forex currency pairs. In order to trade Forex currencies, you’ll need to open a trading account with a regulated Forex broker. Forex trading requires smaller investment and can often deliver high profits.

You can open a trading account with any broker with minimum deposit of just £300. Once you understand the market trends and price movement of various currency pairs, you can make money by following the right trading strategies.

Forex trading is the biggest financial market with £3.3 billion worth of transactions happening on daily basis. Also you can make use of leveraging options in Forex trading with maximum of 200:1 ratio depending on your broker.

3. Investing in Mutual Funds

Mutual funds are collective investment funds,  managed by professionals who pool money from various investors to buy securities. Mutual funds are diversified as they invest in large number of securities like government bonds, stocks, commodities like Gold and silver etc. As your investments are diversified in this way, you minimize the risk when one avenue takes an unexpected tumble.

Mutual funds can also be of different categories such as unit investment trusts, close-end funds, open-end funds etc. Hence mutual funds are always a good option to gain high profits with relatively low risk. Some mutual funds will promise aggressive growth by investing in rapidly growing stocks so as to generate huge profits in short term.

Mutual funds also require very little management from the investor so are a good option for those short on time who are not able to keep a watchful eye on the market.

4. Investing in Binary Options

Binary Options are the recent techniques of investment with which you can generate huge profits with very low risk. Binary options are called so because they can result in only 2 possible outcomes, either the trader wins and makes as high as 85% returns on his investment or he loses the trade and all the money he had invested for that particular trade.

Binary options involve speculating the price movement of various underlying assets like stocks, commodities, Forex currency pairs and Indices. T

he first step for investing in binary options is opening a trading account with reliable broker. You should make sure you choose the right broker who is legitimate and does not charge any hidden fee. Once you open the trading account, you can choose the underlying assets depending on your market knowledge and experience.

You should decide the Strike Price and Expiry time for the particular asset and place the trade. If the asset reaches the strike price before expiry time, you will win that trade and make as high as 85% profits on your investment. Hence binary options are considered as an easy method to make money with relatively low risk when compared to stocks.

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