Forex spread trading or spread betting is a leveraged way to profit from the movements of the currency exchange rates — but the Forex market is already highly leveraged, so you may be wondering why you should choose spread betting.
The usual Forex market involves trading currency pairs such as the USD/JPY, the US dollar and the Japanese yen, and you can take either the long or the short position. In this case long means that you think the dollar will increase in value compared to the yen, and short means the opposite. The normal trade involves 100,000 units of the first currency, and you can make a trade with typically about 100 to 1 leverage, which means placing the trade requires 1000 units, $1000 in this case. Forex traders talk about “pips” of movement, and the pip is a three letter acronym for percentage in point, 100th of 100th which is the fourth decimal place of the conversion rate.
The currency exchange rate is expressed as two numbers, and the difference between them which may be a few pips is the spread, and where the Forex broker makes his money. That’s the system that has been in operation for many years, since fixed currency exchange rates were abandoned.
How does Forex spread trading compare? With spread betting, the spread is the difference between the two prices, one for buying and one for selling, just the same as with Forex trading. You will usually find that the spread when spread betting on Forex is very similar to the spread a regular Forex broker will quote, so spread betting is neither an advantage nor a disadvantage in that regard.
One advantage of Forex spread betting is that you’re not restricted to lot sizes. You can bet as much or as little as you want, subject to your broker’s minimums. Typically you might bet £1 per pip. Note that you can use your own currency in placing the spread bet, rather than having to deal in the currency of the exchange. £1 per pip may give you a similar amount of profit to trading one lot, but the margin or amount you have to put up for the position may be less.
Another advantage of using spread betting for Forex is that your spread betting account will usually give you a choice of financial instruments to trade, and this means you can trade different markets without opening a separate account. You will use the same trading platform so you won’t run into issues of familiarity.
But assuming you are going to make a profit, perhaps the biggest advantage of spread betting is given by its name. It is considered betting, and any profits you make are winnings. Depending on your status as a Forex trader your profits could be considered income and subject to income tax, but most likely will be taxed as capital gains. When you spread bet, your winnings are not subject to tax which means you can keep all of your profits.