Published on March 12th, 2019 | by John Kane0
How Do Binary Options Brokers Earn Money?
BINARY OPTIONS BROKERS ARE IN BUSINESS TO PROVIDE A WIN-WIN SERVICE: THEY INTEND TO MAKE A PROFIT FOR THEMSELVES AND WELL AS PROVIDE AN OPPORTUNITY FOR THEIR CUSTOMERS TO MAKE A PROFIT AS WELL. BUT HOW DO THEY MAKE MONEY IF THEY DON’T CHARGE A COMMISSION?
Binary Options Broker Cut
The main way brokers make money is by taking a cut off of each trade. Even in wins, if they offer only 70% payout on that pair, they will get a 30% cut. In essence, the broker pockets the difference between the percentage losing trades lose and the percentage winning trades make.
To make this clear, let’s look at a simplified example: Suppose a broker has 100 clients. About half the time they buy calls and half the time they buy puts. Upon expiry, about half the traders will receive a payout of generally around 80% (of course this percentage will vary with each trade). The other half will lose all their investment. Assume also each trader places a $100 investment in each trade. Now let’s do the math: Fifty times $75 = $3750. This is the payout the broker needs to pay out to the winners. Fifty times $100 = $5000. This is the amount the broker keeps from the losers. The net profit for the broker is $1250.
Current Recommend Brokers
There are currently a handful of brokers we recommend. It’s also worth noting that all of our recommendations for binary options software, can be traded with Forex brokers via MT4 as well.
Of course, the real world is never that simple. The percentage of puts versus call bought by brokerage clients is never exactly 50/50 and the fixed payout offered will vary. Statistically, however, the broker makes a near riskless profit by offering a fixed percentage of less than 100% to the winners. Keep in mind that it is in the broker’s best interest to have a large and active customer base.
More trades correlate directly with more profits for the option broker. In addition to pocketing the difference described above, brokers derive some revenue by earning interest on the deposits their customers make into their accounts. They also commonly charge miscellaneous fees, such as withdrawal fees or managed account fees to garner additional income streams for their business.
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