Forex Spread Betting Introduction
Perhaps you have heard of the recent popularity of investing in foreign exchange currencies, currently the largest trading vehicle on the planet, in which a trillion and a half pounds is traded each day. Forex trading determines the relative value of global currencies: it has exploded in popularity due to the fact that it there are huge liquidity volumes and there is no conformity to usual daytime trading hours.
Trading currencies involves comparing the strength of one currency against another, so called currency pairs. The most popular currency pair is the United States dollar against the pound (knicknamed Cable), although there are many other trading pairs to chose from in the major currencies. Forex spread betting is another type of trading that allows traders to place a bet on the direction of the market for their particular currency pair, based on the distance that price moves from the ask or bid, which is termed the spread.
Forex spread betting plan relies on similar mathematical principles as gambling. Spread betting companies determine the bid and ask prices for eaqch forex pair. You, in turn, decide which direction the market is likely to go and place a bet in quantities known as “pips”. For example, a hypothetical simplified spread of the Euro against to the United States dollar, currently with a bid price of 1.33, would invite some investors to bet short, if they felt that the Euro was weakening against the USD, and thus sell Euro at 1.33.
So if a trader felt that the USD was going to strengthen against the pound, for example, he would place a long bet at the ask price in the hope that price would increase. Each increment of price is termed a “pip” and he can place his stake according to the amount per pip. For example if he placed a bet of £10 per pip and the trade went in his favour by 10 pips, he would win £100. Of course, if the trade went against him by 10 pips, he would lose £100, which is why the use of stop loss orders is highly important to limit otherwise unlimited losses.
Although many forex traders use spread betting for intraday positions, so that their position is flat at the end of the day, some will want to hold their positions overnight, often for a number of consecutive days. In this case, they are charged a loan fee by the spread betting company, who is, in effect, loaning the trader money to hold the financial stake.
An important distinction between spread betting and conventional forex trading, is that spread betting involves the use of derivatives and does not entail holding actual currency positions as your would do on the forex exchanges.
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.
The growth of spread betting is set to continue as more traders and investors realise the tax benefits in using this form of trading. In addition, the betting platforms are getting more powerful, particularly with mobile based trading using iPhones and Android smartphones so that traders can place their bets wherever they are instead of being tied to a PC.