We often get the question: "What is the difference between binary options and ordinary stock options?". At first glance, stock options and binary options seem to have a lot in common. But when you look more closely, there are some big differences. In this article, we explain the differences between binary options and other options. If you are completely unfamiliar with binary options, we recommend that you read the article 'What are binary options' first.

The similarities between binary options and regular options

Let's start with the similarities between binary options and traditional (stock) options, because they are relatively few. Afterwards we'll take a look at the differences between binary options and ordinary options.

Both binary options and regular options are so-called 'financial derivatives'. That means that their value is dependent on another asset. That other asset we call the 'underlying asset'. That can be a share, or a stock index, but also the oil price, the exchange rate between the pound and the dollar, the success of a new movie or even the weather. The price of a (binary) option depends on the price of the underlying asset.

Furthermore, the terminology used in discussions concerning options and binary options is mostly the same (see also the binary options glossary). The expiration date, the exercise price, the maturity, 'in the money', 'at the money', 'out of the money': all these terms have a similar meaning in both the world of binary options and that of ordinary options.

The differences between binary options and regular options

However, there are more differences than similarities between binary options and traditional stock options. First, an ordinary option is a 'real' financial product. If you close a call option, it will actually give you the right on the expiration date to buy the underlying asset at the exercise price. (However, almost nobody actually exercises his options; most private options traders take their profit or loss at the time of expiration, but will not exercise the option.) This is not the case with binary options. Binary options are a 'virtual' financial product. You only get the value of your return paid out at the end of the term and have no right to buy or sell the underlying asset.

Secondly, normal options are (mostly) traded on a stock exchange. In the UK, this is the London Stock Exchange or the London International Financial Futures and Options Exchange (LIFFE). On the other hand, binary option are traded only via binary options brokers. Individuals cannot access the market for binary options. In fact, it is not one binary options market, but several smaller markets, which are created by different brokers. If you want to trade in binary options yourself, it is therefore important to choose a good broker with sufficient market size ('liquidity').

The main difference between binary and ordinary options is perhaps the number of possible outcomes. A call option on HSBC shares can take many different values, depending on how much that share increases (if the share is below the strike price on the expiration date, the value is always 0). A binary 'higher' option on the Facebook share can only assume two values: 0 in case of a loss, or your investment plus the predetermined return in case of a profit. This makes binary options much more transparent and easy to trade.

Why would you trade in binary options?

There are significant differences between binary options and ordinary options. Why should you choose binary options? There are a number of reasons to do so:

• Binary options are simpler. Since there are only two possible outcomes in a binary option, you don't need to have information about how much higher or lower the price of the underlying asset will be exactly. As long as you correctly predict the direction of a price correctly, you will make profit.
• The term of binary options is shorter. Whereas with ordinary options you must wait weeks, months or even years for the expiration date, the maturity of a binary option is usually a matter of days, hours or minutes. Because the trade is faster, you can purchase options more frequently and turn a faster profit.
• For binary options you need less capital. A standard contract on stock options is always written for 100 shares. The money needed to trade can quickly add up. With binary options, you can trade with a capital of just a few hundred pounds, and the minimum option contract size is typically 25 pounds or less.
• An attractive welcome bonus. The market for binary options is very competitive, and therefore binary option brokers do their very best to get new customers. Some even offer you a bonus on your first deposit. This extra bonus can make you a lot more profit than ordinary binary options.

These reasons make binary options the financial product of choice to trade for the private investor. And it's easier than you might think. You too can become one of the top earners in the derivatives market by choosing binary options.