Forex spread betting is similar to financial spread betting, except that you wager on the rate of exchange between two currencies. For example, if you bet on GBP/USD going up (buy) in spread betting, you’re betting on the pound’s value versus the US dollar increasing. As a result, if the GBP/USD rate rises, you will profit; if it falls, you will lose. When you bet on spread betting that GBP/USD will go down (sell), you’re wagering that the pound will lose value against the US dollar. You place bets in terms of GBP per pip in this sort of spread betting.
Forex spread betting allows you to use leverage when placing trades because it is a derivative product (you don’t own the underlying asset; you simply bet on its price). Leverage is the ability to borrow money from brokers/spread betting providers in order to put larger bets with less cash. When compared to trading without leverage, this helps you to optimize profits on your money because the amount necessary to open trades is reduced. However, while potential returns may be greater when trading with leverage, trading with leverage also raises the dangers involved with trading and can result in larger losses.
MT4 is one of the most popular trading platforms among retail investors. You can check our article on spread betting brokers which offer MT4 here.
Forex spread betting can be capital-gains tax free in some cases, but it’s better to consult with a tax specialist regarding this. You can check the differences and similarities between spread betting and cfd trading here.
Forex Spread Betting Trade Examples:
As previously mentioned, FX spread betting works in terms of GBP per pip. This means that if I were to use a trade size of 1, I would earn or lose 1GBP for every pip move in the price. A pip is normally the 4th decimal of the quoted FX pair. The exception for this rule are JPY pairs where the pip is the 2nd decimal.
If I were to buy GBPUSD at 1.3215 with trade size of 1, thus betting that the pound will appreciate against the dollar, and in a few days the GBPUSD rate went up to 1.3230, this means that the price moved up by 15pips, your profit would be 15GBP (minus overnight fees).
When you do forex spread betting, you have the opportunity to sell (short) thus bidding on the exchange rate going down. If you were to sell USDJPY with a trade size of 15, at 113.550 and a few days later the USDJPY rate fell to 113.350, the price would have moved by 20 pips thus giving you a profit of 300GBP (minus overnight fees).
Ready to start trading? Check our article on best spread betting platforms for beginners.