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Understanding Forex Spread Betting
Written by: PaxForex analytics dept - Friday, 15 December 2017 0 comments
Sharing the center stage with forex and CFD trading in recent years has been financial spread betting, helped on in massive part by growing interest in online trading amongst retail investors. Both forex and spread betting are regarded is risky but potentially lucrative ways to generate a return from the markets, and while both deploy a degree of leverage, albeit in different ways, their characteristics remain largely unique. While some people think that spread betting and forex trading are very similar, in fact, there are a number of important differences between the two that need to be understood.
Spread betting is a derivative product. With a spread bet you don’t actually own the asset (such as a commodity, currency or share) that you’re speculating on. Instead, you trade on margin. This means you get the same level of exposure you would if you bought the underlying asset outright, but for a smaller initial outlay. It also means that you can bet on the price falling or rise. You buy (go long) when you think the price will rise, or sell (go short) if you think it will fall. You complete the transaction - closing your position - by effectively placing the opposite bet.
When you invest directly in an asset, such as when you buy company shares, you have to pay for the full value of that asset. With spread betting, you can gain the same level of exposure but with a smaller initial outlay – the margin requirement. In other words, spread betting uses leverage.
This is one of the key advantages of spread betting over traditional trading. You should remember though that potential losses can be greater than your initial outlay if the asset price doesn’t move in the direction you anticipated.
Spread betting is an attractive alternative to trading currencies in the spot or derivatives markets. In many countries, such as the United Kingdom, you do not have to pay any tax on your earnings from spread betting. To be eligible for this tax break, you must have another job (spread betting must not be your only source of income.) This is a key benefit, as you have to pay income tax on your trading earnings. This can be in excess of 50% in some European countries, especially if you are earning large sums of money.
Spread betting and forex trading are very different. It is arguably the case that forex is seen as a more legitimate forum for knowledgeable traders, partially because the market is more transparency and more considerably leveraged, and partially through a persistent distaste for spread betting amongst some sectors of the financial markets. Financial Spread betting is just one way in which retail traders can speculate on the currency markets, with many traders being attracted to spread betting due to tight spreads and the fact that profits from spread betting are tax-free in certain jurisdictions.