What Is Forex Spread Betting?
If you trade forex you are dipping a toe into a market that transacts over three trillion pounds each day. Trading currencies is attractive not only because of the unlimited liquidity but also because global markets mean that there are no set daily trading hours.
Each forex trade simply trades one currency against another, the most popular being the United States dollar and the pound. Another type of currency trading is called forex spread betting, a form of betting that is relatively similar in nature to sports spreads, in which theouitcome of a sporting event is predicted and bet upon.
Spread betting is based on the same type of mathematical principles as gambling in which the trader places his bet according to his perceived view of the market.
If the trader had placed a bet of one pound per pip, and the Euro fell ten pips against the USD, he will have won 10 pounds if he closed the trade down at that point, minus whatever rate the spread betting companies take as their share. If the market price had moved against the trade, ie the Euro had strengthendagainst the dollar, then the trader will have lost ten pounds The potential for unlimited losses and gains makes it vital that spread betters employ effective risk management strategies using stop loss orders.
Many spread betting participants use a day trading approach in which intraday trades are made and any position is closed at the end of their day, not session because forex is a 24 hour market. Others will want to take a longer view of the market and use a position or swing trading approach in which trades are held overnight or for a number of days. In this case the spread betting company will charge them a fee for financing the bet. These interest charges can add up if large positions are held for a significant time.
A major difference between forex spread betting and currency trading is that a spread bet involves trading a derivative of the currency pair and the spread betting company can determine its own spread. In contrast a trader placing a position on the open forex market will actually be holding the underlying currency (unless he is shorting) and the spread is determined according to market dynamics. That said, spread betting companies are very highly regulated in the UK and have to meet stringent regulations to ensure fair play for their customers.
Why has Forex spread betting grown so fast? The main reason is that under UK tax law, the money you make from a financial spread bet is classified as gambling rather than investing, so it is not subject to capital gains or stamp duty. What's more, unless you rely on spreads as your sole means of income, you will not have to pay income taxes on any money made from betting. This does mean, however, that any losses from spreads are unable to be offset against any future earnings when calculating your taxes. This makes spread betting very popular in the UK with thirty-six percent of all worldwide spread betting taking place in London alone.
With the size and liquidity of the foreign currency market to take advantage of and the tax advantages and efficient spread betting trading platforms, it is no surprise that make this form of trading is so attractive to UK investors. The potential for further growth as forex spread betting attracts more particpants is fuelling an increase in the number of spread betting companies, creating healthy competition between them that benefits the trader eager to try his hand in the forex market.
About the Author
Chris Ray writes about trading and investing for a number of web sites. If you found this article about forex trading useful you might be interested in other aspects of spread betting at http://www.moneyhighstreet.com/investing/
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