What is spread betting forex?
Spread betting is a simple tool which enables you to place a bet on an underlying mechanism, for example the foreign exchange or the commodities markets, in order to make a profit from the movement of one market in value against another. You are able to stake a certain amount of money, for example £1 per each point of price movement, and you win or lose your bet depending whether the market moves for or against your decision. The spread is the cost involved in placing your position.
Forex - what is this?
The forex is simply another term for the foreign exchange currency market or fx. This market is made up of many currency pairings for example the US dollar against the British pound USD/GBP which fluctuate in price. Spread betting forex enables you to take a position in your chosen currency market based on whether you believe the price will rise or fall, in order to profit from price movements.
Why chose spread betting – What are the key advantages?
Spread betting forex has gained in popularity recently, as it enables entry into various markets with comparatively little capital, compared to the more traditional methods of trading. This has made the markets accessible to virtually everyone who wants to trade. Spread betting can be used across a variety of markets; however we are going to focus on spread betting forex, as the forex is the largest marketplace in the world, with both great liquidity and volatility with over $3.2 trillion daily turnover. The key advantages are detailed below.
Spread bets can be placed on movements up and down in price
There are many advantages to spread betting versus traditional methods of trading. The
first is that you can place a bet on both upwards and downward movements in price, you do not need to wait for the market to move in one direction solely before you can place a bet.
Smaller bets – low initial bank and stake required
Spread betting forex is leveraged, also known as geared, so you can trade on margin. This means that you can use a much smaller amount of capital funds to place a bet that you would need in a more traditional equities market. This is possible because you are not purchasing the actual underlying tool, but rather betting on fluctuations on price movement. For example you can bet £100 stake per point, and if the market moves 100 points in your favour, you would profit 100 pounds x100 points =£10,000, plus or minus the cost of the spread. In order to do this you would need enough funds in your spread betting forex account to cover your initial stake and your total risk/position, which is significantly less initial outlay than you would need in a more traditional market. Don’t worry if this sounds complicated, your spread betting forex company will provide training on this, and will do the calculations for you. The above example is a simplified version for demonstration purposes.
Profits from spread betting are tax free
You do not pay taxes on your profit from spread betting forex, as these are classed as winnings and as such are exempt from capital gains tax. There is also no stamp duty to pay as you are not making an actual purchase, but rather betting on market price fluctuations. Quite simply, all your profits are yours to keep. Your spread betting forex broker will take their costs out of the spread when you open and close your positions, therefore you will always be able to calculate your exact profits (and losses) in advance, providing you have a good trading strategy in place.
Spread betting forex is open for bets 24 hours
The forex is open 24 hours and bets can be placed even when the specific currency pairs are not open. You can trade via the phone or the internet, and today most trading platforms have a phone app to allow you to open, close and monitor trades on the move using your smartphone, although this is not essential. Each currency market has a set open and close time. You can also day trade, or decide to carry your trade over a period of days of months, depending on what suits your personal style of trading. You can trade spot fx, futures or options via your spread betting account.
Spread bets can be placed to hedge your position
As you can open a spread betting account in order to bet against both the upwards and downwards movements in price, you can hedge your bets against an open position or a vulnerable portfolio position in order to minimise your losses. This is normally done by more experienced traders. Your spread betting forex company will also employ dealers who hedge the bets placed with them by customers. You can potentially place a trade against movements both upwards and downwards in the same market, in order to minimise your losses, and you can include this technique as part of your trading plan.