I am new to both, but I have a feeling that the mechanics of forex trading and forex spread betting are very similar? Is that correct, instead of betting 100,000 at a ratio in Forex, in spread betting your betting £1 per point – right? I’m based in the United Kingdom so when I go live I’m thinking a spread bet firm will be more tax efficient than a regular forex broker when it comes to collecting my millions?
Yes, you got it right. Spread trading is technically speaking a form of gambling as opposed to investing. So you might want to choose spot forex instead of spread betting because you want to tell your pals that you’re a ‘trader’ not a ‘gambler’ perhaps 😉
Seriously, some forex and CFD brokers also offer spread betting platforms, the latter having the inherent “advantage” of being betting and so you make winnings as opposed to earning income on trading. However, you cannot write off losses against tax where you can with trading accounts.
So what’s the difference between regular forex trading and spread betting on the market?
Spread betting is free of CGT and income tax for the vast majority of retail traders, which can be a significant advantage albeit this also means that it isn’t possible to offset trading losses against any gains made to minimise Capital Gains Tax in other areas.
In fact many retail FX brokers are little different to spread betting providers, because most make their money from the spread (difference in buying and selling price). They’re effectively making the market you’re trading in (or using the market of a larger broker), and in some circumstances they may also have to trade against you. So if you’re trading forex only and you’re based in the UK, it is usually best to go with financial spread betting, it’s much simpler. If you ever get into shares, then you can think about CFDs.
There are FX brokers who make their money by charging you commission on your trade value – they mostly have either what is called an ECN system or operate a Currenex platform. Their interest is mostly for you to trade heavily, so they have no interest in you blowing your account out (unlike other retail FX brokers – that’s why those offer such large leverage). However, most have a minimum account size of $10,000.
In most other areas forex spread betting is very similar to forex trading – both are margin traded instruments and both financial products allow you to take long or short positions. One difference is that with spread trading, the underlying asset is never owned. In a nutshell this means that a spread trader never owns the underlying currency he has purchased; he is simply betting on the price movement, not gaining from a change in the price of currency he has acquired. In most situations this doesn’t make any difference, however if you are planning on using the currency to make purchases elsewhere, spread betting may not be the most suitable route.
In practice spread betting is easier to understand because you don’t have to worry about trading in ‘lots’ – you simply choose your stake, say £1 or £10 per point for instance, and enter your position long or short.
Scenario: Spread Betting Company
The spread betting provider say offers a minimum bet of $1 per pip. If you have a $500 account you might be looking to initially swing trade conservative setups with ‘stop losses’ and ‘take profits’ of -+20$/pips. OK. not that conservatvie as this represents 4% of your equity. So you are set to win/lose $20 dollars a trade, minus 1pip spread at a leverage of 1:1 i.e no leverage.
Scenario: Forex Broker
If you make this similar trade through an Forex broker, you will buy 1 micro lot with a pip value of 1USD, risk 4% of your account with the same stop loss/take profits levels as above.
The spreadbetting provider is offering the same product really as the Forex brokerage company. The only difference is how they handle the actual trade placed with them. In this example both are offering you the chance to trade mini lots ($1 per pip). The margin required by the two groups could be different which could affect your maximum leverage but you’re not going to ever be looking to utilise that. If the terms of the trade for both groups are the same then you have the same leverage with both – the spread betting isn’t a non-leveraged trade. If you’re trading a mini lot you’re effectively being allowed to trade $10,000 while putting up only the margin.
Spot forex, really I can’t see many reasons why someone in the United Kingdom would use them when they can spread bet, not when most providers offer 1pip or 2pip spreads on most forex pairs anyway. The only reason I can see for choosing forex trading over spread betting is to use Meta Trader 4 and Expert Advisers. With spread betting you can bet on indices, stocks, energy markets, precious metals, etc. Moreover financial spread betting is simpler and easier to learn (demo and real) and it’s pretty straightforward since all profits and losses are in sterling rather than the forex pair’s base currency. Apart from that, forex trading and forex spread betting are very much similar and trades tend to have the same margin requirements. One minor difference is that the rollover for overnight positions is charged as a separate fee on a spreadbet, but is included in the price for spot forex which is why the quotes differ slightly.
Having said all that, forex trading and spreads are quite similar these days and the analysis and technicals involved in predicting how the foreign exchange markets move apply equally to both instruments. In other words if you are able to trade currencies profitably you should also be successful with spreads.
“If you are a resident of the United Kingdom or Ireland, then it may be to your benefit to choose the spreadbet account since spreadbet accounts enjoy special tax free status in the UK and Ireland.”