(This accompanies a Special Report: http://www.reuters.com/investigates/special-report/israel-investing-binary/)
By Luke Baker
Sept 27 (Reuters) - What's the difference between binary options, regular options and spread betting?
All three financial products are derivatives - they let you profit from price moves in a stock, currency, commodity or other financial asset without owning the asset. They are cheaper to buy than the assets themselves, so they offer greater potential profit.
BINARY OPTIONS allow people to take a position on the price movement over a fixed timeframe - most often a few minutes or hours. For example, someone could bet $1,000 that the U.S. dollar will strengthen against the Japanese yen over the next 30 minutes. If that happens, many brokers promise the punter will win up to 70 percent of their bet ($700) plus the return of their original stake ($1,000). The precise return depends on the agreed terms of the option. If the dollar weakens against the yen, the punter's entire stake ($1,000) is lost. Similar binary options could be offered on everything from the movement of shares in Facebook (NASDAQ:FB) versus Google (NASDAQ:GOOGL), or the performance of the Dow Jones Industrial Average versus London's FTSE index.
REGULATION: In the United States, binary options can only be traded on registered exchanges or markets overseen by the Securities and Exchange Commission. In Europe, regulators are steadily clamping down but in most jurisdictions binary options trading remains legal either on regulated exchanges or via hundreds of unregulated, Internet-based platforms. In Israel, binary options are banned. In China, the trade is legal and mostly unregulated, while in Japan it is legal only via a small number of regulated brokers.
REGULAR OPTIONS trading is substantially different. Normally a trader buys an options contract from a broker or institution that gives them the right, but not the obligation, to buy or sell an underlying asset, at an agreed price at a fixed time in the future. If the option is to buy the underlying asset it is named a 'call' option, to sell it is a 'put' option. On a regular option, the punter risks the fee they paid.
REGULATION: Options trading is legal and common in global financial markets, with the trade taking place either on regulated exchanges or "over-the-counter" in deals agreed between two parties without supervision from an exchange.
SPREAD BETTING lets people profit not just from the direction, but also from the degree of price movement. For example, if ABC shares are currently at $500, the spread betting company may quote a 'spread' of $480-$520 for the coming week. Bettors decide how much they want to bet for each point that ABC shares will fall below $480 or rise above $520. They stand to win or lose the stake they paid multiplied by the price change. That means the potential winnings or losses can substantially exceed the money they put up, and whether they win depends on the spread quoted by the company. Some spread betting companies offer deals to limit potential losses.
REGULATION: Spread betting is legal and popular in Britain and other parts of Europe, although the way gains are taxed differs among countries. In Australia, Japan and the United States, spread betting is illegal, although many banks and brokerages offer derivative products that emulate spread bets. In China, spread betting is broadly illegal, although it is allowed in special administrative areas like Hong Kong and Macau.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Mind the gap: Online gambling scam traps thousands
http://www.reuters.com/investigates/special-report/israel-investing-binary/
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Edited by Sara Ledwith)