Many people do not really understand how binary options brokers make money since they do not charge for commissions. These brokers have numerous ways to make money although payout percentages account for a majority of their earnings.
Profits with Minimal Risk
When you work as a binary options broker, you can make almost risk less profits. This is possible thanks to percentage payouts that they receive from trades and also from trading with clients. Renowned binary options brokers have very many clients. Despite the number, about half of the traders believe an asset’s value will go up while another half thinks it will go down. If the trend is strong enough, the numbers may vary in both directions. In most cases, the number of put and call buyers ranges between 40% and 60% with a 50-50 average over time.
As the trades take either side, the brokers then make their money. To make this even easier to understand, consider a broker who has 100 clients with 50 buy calls and another 50 buy puts. When the option’s time runs out, the winning 50 get their 80% payout together with what they had invested. The other 50 lose their money. Assuming that each trader had invested $100, the broker gets $5000 from the losers. From the $5000, he or she pays out $4000 to the winning traders and keeps a cool $1000. That is why this is an almost risk free venture.
This above is just an example of how trades may look like. However, the real world is more complex although the scenario is more or less the same. You will definitely not get a 50/50 division between call buyers and put buyers. To maximize their profits, binary options brokers want to have very many clients trading with lots of assets. Furthermore, having more clients means that they will have many options being traded. This takes them close to the 50/50 scenario that maximizes their profits.
If multiple assets are actively traded and the broker has to pay out more than he or she received from the losers on one option, other options will compensate for this. This iterates the importance of having many clients who are trading in many different options. With a large number of trades, the broker will always have a mathematical advantage and with time, the brokers can take home a payout of between 60% and 80%.
Who Do Brokers Trade Against?
It is common to think that binary options brokers trade against their traders. Although they have their other trades, they work best when they play the role of middlemen. As middlemen, they can make money without really taking opposing positions with their clients. Furthermore, this takes away risks associated with being on the losing side and thus saves them money while minimizing their risk factor. Being on one side could also tempt them to undertake unscrupulous tactics to win, something that is not good for business.
Looking at this, the best brokers are those that rely on the difference between payouts to make money instead of taking opposite sides. Furthermore, there are clients on both the winning and losing end and the broker can only be engage them well if he or she is neutral.
Others Ways Brokers make Money
Apart from options, brokers also make money through miscellaneous fees paid by their clients. Many of them have withdrawal or account management fees.
They also get interest from deposits made by their clients. When you give the broker money for deposit in your account, you will not get any interest but the broker can make money from your money and pocket the interest. This is in fact a good way to make money if the clients make huge deposits although having more clients also helps collect a sizeable sum.
In most cases, binary options traders make most of their money from the difference between the put and call buyers. They also make some money from service charges and interest earned on deposits. Although it is possible for them to take sides, it is always prudent that they remain neutral which is the norm. By bringing call and put buyers together, they can collect near riskless profits. There, understand that your broker will do simply sit back and watch the different assets and trades fluctuate knowing that at the end of the day, he as a percentage to take home.