The FSMA (Financial Services and Markets Authority) warns the public about the significant risks of investing in binary options. These products are appropriate only for those who really wish to speculate, are ready to lose the entire amount invested and are familiar with derivative financial products. Moreover, certain providers of binary options do not have the necessary authorization.
Making quick money with binary options?
Increasing numbers of investors have recently been receiving offers to enter into an "all-or-nothing" contract, or binary option. This involves paying a sum of money and making a prediction about the changes in price within the next few minutes, hours or days, of for instance:
- a share index (Bel20, Eurostoxx50, etc.),
- a foreign currency (US dollars, British pounds, Japanese yen, etc.) or
- a commodity (gold, silver, oil, etc.).
If their prediction is fulfilled, then they get their money back along with a sizeable profit. If their prediction is not fulfilled, then they lose all the money invested.
Providers offering these options hold out to investors the promise of making money easily with binary options. However, this is a risky financial product, and the chance of losing one's entire investment is greater than the prospect of earning money. It is therefore dangerous to invest in binary options. Furthermore, certain providers of binary options do not have the necessary authorization and/or do not abide by the conduct of business rules.
Binary options: an example
Take the example of a binary option linked to gold, which is selling let us say at USD 1,310. The investor hopes the price will rise, and so buys a binary call option. The option costs EUR 100 and promises to pay EUR 70 if the price of gold in one hour's time is higher than USD 1,310.
An hour later, there are three possible situations:
- The price of gold is lower than USD 1,310. The option yields nothing and the investment of EUR 100 is lost.
- The price of gold is USD 1,310. The option yields nothing and in principle the investment of EUR 100 remains on the investment account.
- The price of gold is higher than USD 1,310. The investor receives EUR 70 over and above the EUR 100 invested.
What risks do binary options pose to the investor?
- An investor in binary options runs the risk of losing the entire sum invested.
- The chance of losing is greater than the chance of winning: the maximum amount one can earn is generally set at 70 per cent of the initial investment. On the other hand, there is the possibility of losing the entire sum invested.
- Some options have an expiration time of less than one minute. The shorter the option's maturity, the more difficult it is to determine the right moment to enter a given market and thus the more the investment resembles a game of chance.
- Once a binary option has been purchased, it cannot be sold before its expiration. Binary options are therefore not liquid.
- An investor cannot usually check whether the change in price between the beginning and the end of the expiration time was correctly calculated.
Who may sell binary options?
Only investment firms or credit institutions with an authorization in Belgium may offer binary options for sale[1]. The FSMA website maintains lists of authorized investment firms and credit institutions in Belgium.
Tips for investors who would nevertheless like to purchase binary options
- Binary options are not a suitable product for regular investors. These products are appropriate only for those who really wish to speculate, are ready to lose the entire amount invested and are familiar with derivative financial products.
- If a consumer would nevertheless like to invest in binary options, he or she can enquire whether the provider is authorized to offer investment services in Belgium. This information can be found using the search function on the FSMA website or by contacting the FSMA (tel.: +32 2 220 59 10; email address: info@fsma.be).
Consult the "investors' checklist" on www.wikifin.be
The checklist contains handy tips on all types of investment (available in Dutch or French), including investments not subject to the FSMA's supervision.[1] Moreover, addressing communication, in any form whatsoever, to the Belgian public inviting them to acquire binary options on an online platform may constitute a public offering in Belgium that requires prior approval of a prospectus by the FSMA.