Understanding of Spread Betting for Forex Traders

At the very first glance of the word “spread betting”, it seems to imply a level of risk tantamount to gambling, rather than the typically more measured trading. Actually, spread betting is one of the leverage-based derivative products that offers significant market exposure with low initial investments, and a popular way traders can use to go long or short on thousands of financial markets, including indices, shares, currencies, commodities and more.

In this article, we are going to take a look at the trading principle of spread betting, and the differences among spread betting and gambling and CFDs, and how does it work.

What is Spread Betting？

Spread betting is one of the leveraged products, the value of which is derived from an underlying asset. It is mostly used to make short-term trades, based on predictions regarding the direction of price movement of the underlying asset.

There are 2 prices that traders to watch for in spread betting:

· Bid price or the price at which you can buy the asset

· Ask price or the price at which you can sell it.

The ask price can be lower or higher than the bid price. The difference between the bid and ask prices is called the spread.

Speculation on a variety of financial instruments, including forex, commodities, stocks and fixed income securities can be done by investors in spread betting, which offers a range of diversification. It is a leveraged product, which means that only a portion of the actual value of the underlying asset needs to be paid by the investor. While doing so increases the chances of higher gains, it also multiplies the potential loss, since investors can lose more than their initial investment.

Understanding of Spread Betting

As we mentioned above, some investors may make misunderstanding of spread betting, thinking it the same with gambling. Actually, in the UK at least, spread betting is regulated by the Financial Conduct Authority as a trading activity, rather than the gambling commission, clearly showing there may be more to spread betting than first meets the eye.

1. Spread betting VS Gambling

Spread betting in forex is betting on forex market. Forex market doesnt have off-days, neither is its outcomes random. Forex market can be forecast on the basis of external factors, such as economic data and current affairs, and patterns can be identified to indicate likely movements. Forex market is consistent, and reflect the attitudes and behaviours of ordinary traders. By getting into the mindset of the trader and how he might react to certain other variables, it becomes possible to stake against much more predictable outcomes. While that doesn't necessarily guarantee more success, the benefits of being informed in your decisions afforded by forex spread betting make it a preferable option for the serious trader.

Gambling denotes taking a punt, taking a risk on an outcome that is determined by substantial elements of chance. While there might well be one horse that's faster than all the rest, it may have an off-day, or it might not feel right ten minutes before it races – these are factors you cannot predict, factors you cannot control and factors to which you surrender your destiny when gambling on a horse.

Spread betting is completely different from gambling, and although both involve placing an initial stake, financial spread betting is a totally different ball game. While the levels of risk in spread betting can far outweigh those with traditional gambling (and are not limited to the initial stake), the degree of control afforded to traders is significantly deeper, allowing more informed decision-making and more predictable outcomes. For this reason, many traders prefer the term'spread trading' as a more accurate reflection of the practice.

2. Spread Betting VS CFDs

While both spread betting and CFDs might seem to be similar since both are derivative, leveraged instruments, they do differ in specific ways.

· Profits made on spread betting are exempt of stamp duty and capital gains tax, whereas CFDs are exempt from only stamp duty, since you don't own the underlying asset. However, capital gain tax is applicable on the profits made via CFDs.

· Spread betting is available only at specific geographical locations where it is legal. It is available in the UK, whereas CFDs are available globally.

· No extra commission is charged in spread betting, since spread betting offerings earnings on the spread provided. On the other hand, a commission is charged on the execution of CFDs.

· Spread betting involves trading in a base currency of your choice, whereas CFDs are traded in the base currency of the market in which you are trading.

· Spread betting has less transparent pricing, since brokers have the freedom to quote their own prices. In CFDs, however, futures and even the underlying assets and markets are speculated upon, making it easy to determine where the CFD price comes from.

· Spread betting has a fixed time period, usually with no time-related charges. On the other hand, both short and long positions can be held in CFDs, based on whether you expect prices to rise or fall. CFDs attract daily charges.

· Spread betting may entail a wide gap between the buy and sell price, whereas CFDs don't have any such gaps in pricing.

· Dividend is debited or credited off the account of the investor in CFDs, depending on whether you take a long or short position.

How Does Spread Betting Work in Forex Trading？

With spread betting trading in the UK, you don't buy or sell the underlying forex currencies. Instead, you place a spread bet based on whether you expect the price of currencies to go up or down. If you expect the value of currencies to rise, you may open a long position (buy). Conversely, if you expect the currencies to fall in value, you may take a short position (sell). You will make a profit or loss based on whether or not the market moves in your chosen direction.

Spread Betting Trading Benefits

Many investors choose to spread bet on the financial markets as there are advantages of spread betting over buying physical assets:

· You can sell (go short or short sell) if you think the price of an instrument is going to fall

· You can trade on margin, so you only need to deposit a small percentage of the overall value of the trade to open your position. Remember, this means that your potential return on investment is magnified, as are your potential losses

· Spread betting profits are tax-free* in the UK

· You can trade on indices, forex, commodities, global shares and treasuries

· There is no separate commission charge to pay on spread bets

· You get access to 24-hour markets

· There is no stamp duty* to pay

A Spread Bet Stake

With spread betting, you buy or sell a pre-determined amount per point of movement for the currencies you are trading, such as $5 per point. This is known as your spread bet 'stake' size. This means that for every point that the price of the currencies moves in your favour, you will gain multiples of your stake times the number of points by which the currencies' price has moved in your favour. On the other hand, you will lose multiples of your stake for every point the price moves against you. With spread betting, losses are based on the full value of the position.

Conclusion

With spread betting, you buy or sell a pre-determined amount per point of movement for the currencies you are trading. Spread betting may be ideal for investors who want the opportunity to try and make a better return for their money. However, it comes with significant risks to your capital and is not suitable for everyone.