Binary options are not completely banned in the UK, but brokers are prohibited from marketing, selling and distributing them to non-professional traders (retail traders). This restriction was put in place by the UK Financial Conduct Authority (FCA) in 2019 to protect non-professional traders in the UK.
Binary options, often marketed as a quick and easy way to make money, have faced significant scrutiny in recent years due to their high risk, similarities to gambling, potential for trader exploitation.
Even though it is not illegal for retail traders in the UK to engage in binary options trading (the ban targets the brokers, not the traders), it is strongly advised against. No binary options brokers that market, sell or distribute binary options to non-professional traders are authorized by the FCA. If you still decide to use a binary options broker and run into problems, getting help from the legal system will be more difficult as the broker is not operating from the UK. Brokers that still market, sell and distribute binary options to non-professional traders in the UK are usually based in lax offshore locations far away, where they know that the legal system is likely to leave them alone.
For non-professional traders in the UK looking for safer and more transparent trading opportunities, there are several alternatives to binary options that offer better long-term potential.
What Are Binary Options?
Binary options are financial instruments where traders bet on whether the price of an underlying asset—such as a currency pair, stock, or commodity—will rise or fall within a specific time frame. If the prediction is correct, the trader makes a fixed profit. If not, they lose the entire stake. While this might sound straightforward, the reality often proved problematic for traders.
The binary nature of the binary option, combined with payout that is far lower than 100%, makes it mathematically difficult to stay profitable over time, especially when we also consider the high risk nature of short-term speculation.
Example: You purchase a binary option for £100 where the payout rate is 75%. This means that if your prediction comes true, you keep your £100 and the broker must pay you an additional £70. The £70 is your profit. If your prediction instead turns out to be wrong, the broker takes your £100 and you are left with zero. Thus, when the broker wins, the broker gets £100, but when you win, you only get £70. As you can see, the odds are stacked against you.
You can learn more about binary options and binary options trading by visiting Binaryoptions.net.
Why Were Binary Options Banned in the UK?
Binary options are not banned in the UK, but brokers are prohibited from marketing, selling and distributing them to non-professional traders (retail traders). The FCA’s ban on binary options for brokers working with retail investors is aimed at protecting consumers from a variety of high risks. The FCA concluded that the overwhelming potential for loss outweighed any legitimate investment opportunities.
High Risk and Gambling-Like Nature
The fixed payment and all-or-nothing nature of the product closely resembles gambling rather than investing. This creates a high-risk environment where traders can quickly lose large amounts of money.
While longer-term binary options exist (e.g. 30 days), binary options brokers tend to market their short-term binary options more heavily, and some of them are extremely short-term. It is not difficult to find binary options brokers where you can purchase binary options with a lifespan shorter than 1 minute. The combination of a very short lifespan and the all-or-nothing nature of the binary options creates a situation where, psychologically speaking, binary options trading is very similar to putting your money on red or black at the roulette table.
Misleading Marketing
Many binary options providers target inexperienced investors with promises of quick and guaranteed profits. These claims often downplay the risks involved, misleading traders into believing binary options is a reliable way to make money.
Widespread Fraud and Scams
A lot of fraudsters are using binary options as a lure to find victims. There are for instance fraudulent operators who pose as legitimate brokers but will manipulate trades, prevent withdrawals, or simply disappeared with clients’ funds. These scams have led to significant financial losses for retail investors, prompting regulators to take action.
Lack of Transparency
Some binary options brokers are deliberately opaque. With such brokers, there is a lack of clear pricing mechanisms, and traders have limited visibility into how outcomes are determined. This makes it difficult to verify whether trades were executed fairly, further eroding trust in the product.
Alternatives to Binary Options for Traders in the UK
For non-professional traders in the UK who want to trade or invest without the high risks and questionable practices associated with binary options, there are safer and more transparent alternatives. These options allow for greater control, better risk management, and long-term profit potential. Always use a broker that is FCA-regulated. If you run into an issue with your broker, it will be much more difficult to get help if the broker is based in a far away offshore haven known for its lax approach to trader protection.
Contracts for Difference (CFDs)
Contracts for Difference (CFDs) share some of the positive aspects of binary options, but you can obtain them from well-established FCA-regulated brokers with a good reputation.
CFDs are financial derivatives that allow traders to speculate on the price movements of assets such as stocks, commodities, or currencies without owning the underlying asset. Unlike binary options, CFDs give traders more control, including the ability to set stop-loss and take-profit levels. However, CFDs come with their own risks, particularly when leverage is involved, so they should be approached cautiously.
Investing In Stocks
Investing in stocks is a more traditional and more reliable way to build wealth over time. By purchasing shares in a company, investors gain ownership and can benefit from price appreciation. Some companies also pay dividends to shareholders.
Unlike binary options, stock trading involves real assets and allows investors to analyse a company’s longer-term performance to make informed decisions.
Within a stock portfolio, you can pick stocks with varying degrees of risk, to achieve your desired combination. Many novice investors start by building a base of so called blue chip stocks, i.e. they invest in very large and well-established companies with a solid financial situation. Once you have a base in place, you can elect to be a bit more adventurous and add shares that are considered a bit riskier.
Forex Trading
Forex (foreign exchange) trading involves buying and selling currency pairs to profit from changes in exchange rates. While forex trading carries high risks, it is still more transparent than binary options trading, and offers opportunities to implement strategies such as stop-loss orders to manage risk. Forex trading is legal and regulated in the UK, even for retail traders.
Exchange-Traded Funds (ETFs)
ETFs are investment funds where the fund shares are listed and traded on an exchange, e.g. NYSE. This makes it easy to buy and sell shares quickly and the liquidity is normally high. There are many ETFs available designed to track the performance of an index, sector, or commodity. They offer a diversified, low-cost way to invest in a broad range of assets, reducing risk compared to single trades.
Options Trading
Options trading is not recommended for novice traders, partly because the pricing of options is a bit complicated. Traditional options (not binary options) allow traders to buy or sell the right (but not the obligation) to purchase an asset at a predetermined price within a set time frame. This form of trading provides more complexity and flexibility than binary options, as traders can develop strategies to manage risk while maximizing profits.
Choosing the Right Alternatives
The best alternative to binary options depends on your risk tolerance, financial goals, and level of experience. If you need to put together a low-risk portfolio, you can for instance combine stocks, ETFs, and gilt (UK governmental bonds), to achieve stability and growth potential with reduced risk.
For money where you are willing to take on bigger risks, you can for instance engage in more active day trading or swing trading of stocks or forex, provided you have the time and energy for active trading and the work required to analyse these markets correctly in real-time.
Regardless of the alternative you choose, it’s essential to trade through regulated brokers, use risk management strategies, and continually educate yourself to improve your trading skills.
Even though it is not illegal for retail traders in the UK to buy binary options, it is strongly adviced against, and it is better to seek out suitable alternatives. The FCA restrictions on binary options in the UK aims to protect retail investors from the high risks, scams, and lack of transparency that plagues the industry. Fortunately, there are safer and more reliable alternatives available for traders and investors. By choosing an FCA regulated broker and developing a clear strategy, traders can pursue their financial goals with confidence and greater control.