How Do Binary Option Brokers Make Their Money

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How Do Binary Options Brokers Make Money?

Over recent years, binary options trading has become an accepted form of investment in the financial markets. Unlike the forex market or stock market where the brokers charge spreads or commissions, binary options brokers don’t work in this way. This often raises the question of “How do Binary Option brokers make money?” It’s obvious that binary options brokers are making money, otherwise they would have stopped functioning a long time ago. The question is how and the answer is seemingly shrouded in mystery.

Binary options brokers actually make money through a variety of ways. However, the precise method is dependent on the business model of the broker. One way of making money is through the pricing of the binary options. Another way is through the trading activities of traders.

Pricing Of the Binary Options

Binary options broker normally obtain their pricing structures from their liquidity providers. What many traders are unaware is the fact that the pricing of the binary options that they are trading in is marked up slightly from those in the market. When we want to trade in binary options, we check out the prices of the asset displayed on the trading platform together with the expected payout in dollars and cents. If we pay closer attention, the expected payout is not calculated based on a true percentage payout. A certain portion of the payout is actually retained by the broker and this is the commission that the binary options broker is earning.

Another way for binary options broker to make money is through the trading activities of their clients. Let us suppose that Acme Binary Options broker has 500 clients. Let us further assume that 250 of these clients wish to bet that the GBP/USD will go up within the hour and they bet $100 each. The other 250 clients want to bet $100 each that the GBP/USD will fall within the hour. This mean the total money pooled in the market is $50,000. On the trading Platform, the GBP/USD displayed a paid out ratio of 80% if the trade is in the money.

After an hour, we find that the GBP/USD actually ended up. So the 250 of traders that bet for the GBP/USD to rise ended up in the money with $180 each. For those traders who ended out of the money, their return is zero. Hence, the total payout comes to $45,000. This mean there is a balance of $5000 in the market pool which the broker can walk away with. Our example is just based on one trade of the GBP/USD in one hour. Just imagine that there are 10 to 20 such trades every 24 hours, this mean the broker is easily earning $50,000 to $100,000 per day! If we take that amount and multiply it 5 times a week for four weeks, we ended up with a figure ranging from $1 million to 2 million in a month!

Of course our example above also presupposed that there is a balance between both sides of the market which is unrealistic in the real world. Nevertheless, the example is able to illustrate to us very clearly how binary options brokers makes their money.

How do Binary Options Brokers Make Money? It is simple!

Though it may not be a secret anymore, but many people often misunderstand how binary option brokers make money! There are many investors who are afraid to trade with binary options because they think that the brokers make their money by exploiting their funds.

However the reality is far from that. (Although,there are some scams out there).

This article will focus on the simple technique used by brokerage companies to earn money. Being aware of this technique can help you become more confident as a trader. So, let’s begin!

Unlike the stock market or forex trading, the brokers do not charge any form of commissions on the trade that you place.

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However, it is obvious that they are making their money some way. Otherwise they would have never survived in the market.

Where does the money come from in binary options

“The broker makes money when the client loses it”. But does this mean that the broker wants you to lose in order to make money?

Not exactly. It does not have to.

The broker has to get its own share after a plethora of traders who made millions trades. In this perspective, the broker remains indifferent to a single trader’s win or loss. It gets the money because the win is less, compared to another trade’s loss. I made it a bit simpler than reality just to get the main idea.

In addition, a report from a binary options broker shows that 85% of traders lose their money.

That means that it is very profitable to be a binary options broker. And risky to be a trader.

But there is still 15% of traders, who manage to take money from the broker.

Unrealistic Example of how binary brokers make money

Let’s say that a binary options broker has 2000 customers. The 1000 of them bet that the EUR/GBP will go up and they bet $1 each. The other 1000 customers bet $1 each that the EUR/GBP will go down. The broker has got $2000 so far. The return is ,let’s say, 85%.

Let’s assume that the Eur went up. The first 1000 traders won $1.85 each, $1850 all of them.

The other 1000 traders who lost the bet get nothing. Thus,the broker ends with $150 in his pocket.

The main key is that the return percentage is,of course, never above %90. And it is always calculated by the brokers to be under the percentage that would made them lose money.

The Business Model of Binary Options Broker

The business model of binary brokers and stock market is not exactly the same. The answer to how binary option broker make their money lies in the difference between profits that you earn and the loss that traders make or the vice versa.

Basically, “good” regulated binary options brokers never use any illegitimate way to earn money and you can surely get profitable returns from them. On the contrary, there are certain brokers that aim for sustainable business and for this they have to be 100% legal.

Many people wonder how to become a binary options broker. Money,staff,money and money is what you need.It is for them that already have the money. You could have a broker company with less money but you could never compete the hundreds of brokers out there.

The important thing is to understand what makes successful traders different from those who lose.

How do binary options traders make money?

To be like the successful and rich traders, you have to make a note of the techniques that brokers implement for earning money.

Traders think that it is only about exceeding broker through risk. They try new and promising strategies that will give them an edge over the broker.

But,the eye-opener here is that you are not trading against the broker or financial institutions. It switches from one person to another- just like financial transactions. So, the idea is not to exceed the bank but other fellow traders who are part of the same race.

Can you make money in binary trading?

The use of full-proof strategies is not the only way you can achieve it.Instead discover the scenario where you as an individual trader can earn money. Then make the most of this scenario in particular.

There is absolutely no secret, no trick or no strategy to this. You have to understand that and make your move accordingly.

How Do Binary Option Brokers Make Money?

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.

Trading Activities

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.

Honest Brokers

Licensed, regulated, accredited, an honest broker generates money from the trading volume. A report of binary options trader data from Japan in 2020 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

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.

Other Ways

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:

Editor’s Note

Don’t slack off on your stocks trading. Learn all that you can from those who’ve made their fortunes in stock trading. Hedge fund trading founding father John Thomas offers a subscription service wherein you receive learning materials on the trading business, and while you’re getting your bearings, he’ll also send you trade alerts that cue you on which stocks to buy and when. All in all, an amazing opportunity to learn from the very best, and make a profit while you’re doing it. Visit John Thomas’ site to learn more.

Comments

mark anthony says

I am really grateful to Bailey Aart for his help in my trading life, I really benefited greatly from his profit am getting from his trades with his strategies given to me without any fee, I was once an epitome of losing and I thought Binary & Forex Trading ain’t real and to good to be true, but now am currently earning great profits, and I was finally able to recover all that my brokers(s) took from me without allowing me to withdraw all through his help I really thank him for his support and I just have to share here that not all are the same as we think they are, they are really people who are God fearing and kind to be with.

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