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Spread Betting vs Forex Trading: What to Choose?

Today we are offering you a comparison between two ways of financial speculation – forex trading, of which we are all fond of, and spread-betting. Being popular mainly in the UK, spread betting is terra incognita for many traders, and in addition has a somewhat negative image due to its resemblance to gambling. If you compare forex and spread betting closely, though, you will see that the two have tons in common and that it is worth considering spread betting as a way of participating in the financial markets.
 
 

How does spread betting work?

 
In spread betting you get to place bets on the price movements of various market instruments and to make profits according to the correctness of your predictions and the size of your bet stakes. 
A spread betting provider quotes two prices – a bid and an offer and you have to take a position on whether the market will move higher or lower than the present quotes.  
 
Unlike forex trading, which involves speculation with currencies, spread betting offers more instruments on the menu – stocks, indices, even outcomes of sports games. Obviously, in this article we are mainly interested in financial spread betting and the one thing you should keep in mind is that it uses derivatives – for example, you may bet on the price of shares, without actually owning them.
 
 

Come on, fellows, place your bets!

 
Let's say that you want to spread bet using the currency pair EURUSD and that (in our imaginary land) this pair is offered at a spread price of 1.3607/1.3609. You expect the market to rise so you go long and buy the pair at 1.3609 for a certain stake – say, GBP10 per point. This way, you will gain GBP10 (your spread bet stake) for every point that the EURUSD rises above the 1.3609 price.
 
Now, if you are right in your expectations, and the price of the EURUSD goes up, say to 1.3620, you may wish to close your trade. You go to the spread betting platform to sell back your spread and you see that the new spread is 1.3620/1.3623. You sell your trade at 1.3620 for a profit of GBP 110 – the product of the number of points the pair has risen and your stake. 
 
Beware that in case your forecast is wrong and the market plunges, you get to lose money. 
 
One difference between forex trading and spread betting should be clear at this point – there is no such thing as lots in spread betting, instead there is a bet (per pip) whose size you pick.
 
 

Is spread betting legal?

 
Spread betting is legal in the United Kingdom and Ireland, where the Financial Services Authority (FSA) is in charge of it. Later this year, however, the FSA will be split into the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA), and, henceforth, there will be a new watchdog – the PRA, responsible for spread betting and forex trading.
 
In Australia, only sports spread betting is allowed, however forex trading is vastly available there.
 
In some countries, where financial spread betting is prohibited, providers offer contracts for difference (CFDs) – the difference in question is that between the price when a trade is entered and exited. In case the difference is positive, the seller pays the buyer and in the opposite case – the buyer has to pay the seller. You can trade with CFDs in many countries, including the UK, France, Germany, the Netherlands, Switzerland, Canada, Japan, Singapore, and South Africa.
 
In the USA you can't make use neither of spread betting nor of CFDs, as they are both prohibited. There is a loophole, however, as money line betting (a type of sports betting) closely resembles spread betting.
 
 

Benefits of Spread Betting

 
By now you have probably noticed that spread betting is very, very similar to forex and you may be wondering why the need of two services so alike. The answer is quite simple: taxes. In the UK, a country known for its hefty taxation regime, taxes are eating into the forex trading profits – sometimes costing traders as much as 40% of their earnings. Officially considered a form of gambling, spread betting on the other hand enjoys tax-free profits – no stamp duty and capital gains tax for it!
 
Note, however, that you get a tax-free ride only if spread betting is not your primary source of income. If you make a living out of it, the tax net will be all over you. 
 
And, by the way, spread-betting providers are not exempt from taxes in the UK – they do pay a corporation tax.
 
A perk for spread betting providers in the UK is that there is no fixed capital requirement – instead it is variable, depending on the market situation, and factors like the credit risk of the particular company. In contrast, in other countries there are fixed minimum capital requirements for forex brokers - in the U.S., this level is $20 million; in Switzerland – CHF 20 million ($21.2 million); in Australia - $500,000; and in Cyprus - $1 million. 
 
Traders get to enjoy a bunch of benefits from spread betting as well – there are no interest/swap charges, in case you hold a position open for more than a day like in forex trading. 
 
While forex brokers tempt you mainly with deposit bonuses, spread betting providers offer free credits – money into your account that allows you to start betting straight away. Both offer a range of similar services such as contingent orders, different money management strategies, as well as demo accounts to test your skills. 
 
Another benefit is that like forex and CFD trading, spread betting is also a leveraged product, meaning that you can trade with a small investment that can turn into heavy profits. Be careful, however, as leverage may translate into wider losses as well. 
 
Your spread betting accounts are protected by the FSA, under the Financial Services Compensation Scheme (FSCS), which allows clients with accounts of less than GBP 50,000 get full compensations if the provider goes into administration. 
 
 

Pick your favourite cup of tea

 
Spread betting is very popular in the UK and, according to data from the Investment Trends 2012 Leveraged Trading Report, the number of spread betters in the 12 months to July 2012 (92,000) exceeded the count of retail FX traders (74,000). Obviously, spread betting has its advantages over more traditional trading methods.
 
Many brokers, like City Index and FXCM, do not favor a single method, and instead offer both forex and spread betting.
 
After presenting you with a spoonful of information about fx trading and spread betting, we hope that you can now choose your preferred cup of tea.
TAGS: spread betting  forex trading  uk  platforms  brokers  trading platforms  bid  ask price  sports  gambling  fsa  contracts for difference  derivatives  leverage 
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