All investment is risky but some propositions amp up the stakes to levels akin to slot machines in Las Vegas.
Binary options are one of these. They allow you to bet that a stock, currency, index, or just about anything that is capable of being measured in financial terms, will move up or down in seconds.
In the time it takes to spin a coin, you can win back your money plus a percentage – or lose the whole lot.
Viva Las Vegas: binary options amp up the stakes to levels akin to slot machines
They have been labelled as ‘the biggest investment con in Britain’ by consumer group Which?, while the Financial Conduct Authority warned in November that those who pile their cash into such propositions make a loss more often than not.
Investors of binary options are often lured by flashy marketing campaigns often through social media from providers promising eye-watering rates of return.
However, the sad reality is that people typically lose money on them, and the quick-fire nature of these trades leads to uninformed decision making.
Investors are offered higher returns for lower probability events and lower returns for higher probability events, so they need to ‘beat the odds’ on a regular basis to make a profit.
This factor, along with the short duration of trades, can cause addictive behaviour typically associated with gambling, according to the City watchdog.
The regulator also said those who invest in binary options are at greater risk of falling victim to scam artists than the more mainstream propositions.
Such unscrupulous individuals commonly take bets from punters but fail to place them on their behalf, and manipulate software to distort prices and payouts – meaning they could control whether the victim would win or lose.
They also commonly refuse to return client funds and break all contact with customers.
Around £50million has been reported lost to binary options – £18million of which has been reported in 2017 alone, according to the latest police figures.
In the publication of its research, Which? outlines the perils of an unnamed individual who invested and lost the £60,000 and ‘dozens’ of five-figure bets – each lasting a few seconds.
Which? alleges the firm was acting as a bookmaker and such transactions were rigged. Magnum Options, has since been shut down by the Insolvency Service.
Another person was charged twice for an initial investment of £10,000 with another binary broker BinaryTilt following a persuasive sales pitch.
After trying to reclaim the money he discovered a £4,200 bonus had been added to his account – forcing him to trade his money many times over before he could withdraw a penny.
BinaryTilt failed to respond to This is Money’s request for a comment on the matter.
A key risk of binary options is the fact they are typically priced in a similar manner to fixed odds bets, according to the FCA
Which? said it was concerned by the terms and conditions of all 10 companies reviewed. It said that many offered initial bonuses that required investors to trade up to 40 times their deposit before they were allowed withdraw cash.
What’s more, the consumer group claimed that some sites stated that customers would only be allowed to withdraw their profits – effectively banning them from getting their original investment back.
‘Shockingly, others had clauses which meant the money in the account was effectively owned by the site and could be used for their day-to-day business operations,’ it added.
At present, the Gambling Commission has overseen binary options trading but only if the firm has remote gambling equipment in the UK.
To check whether a company holds an operating licence from the Gambling Commission, you can search its public register of licensees.
From 3 January, 2018 binary options will be regulated in the same way as investment products and will be regulated by the FCA.
This means they will be regulated in the same way as vanilla equity and bond investment products, so any individual complaints will be resolved by the Financial Ombudsman Service and consumers will have access to the Financial Services Compensation Scheme.
Should you invest in binary options
The industry consensus is that binary options should form no part of an investment strategy – be it long or short term.
Some investors might find these products attractive because they essentially only have to guess whether or not something specific will happen. Sounds simple right?
But more often than not, it is a case of heads I win, tails you lose for the broker.
‘Binary options are a ludicrous, high risk, short-term bet.
‘Those who absolutely must play high stakes games would have more fun at William Hill betting on a White Christmas – but don’t bet the ranch,’ says Justin Urquhart Stewart, co-founder and head of corporate development at Seven Investment Management.
‘And more crucially, don’t confuse it with a sensible long-term investment strategy. It is horrifying to see that around £50 million has been reported lost to binary options scams. It’s another rallying call for more financial education.’
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