Trading forex using spread betting – Forex trading is a huge market, operating almost around the clock.Spread betting offers access to these markets via familiar platforms.So how can someone start?This article will explain.
Breaking into the world of investing, whether through forex trading or stocks and shares trading, used to require a significant amount of capital, the right connections, and someone willing to show you the ropes.
Today, you can find everything you need to start investing online, and you can start trading with as much or as little money as you like.
One of the first and most important lessons that any new trader learns is that assets and financial instruments can go up or down in value; you can never guarantee what will happen.
Because every investment an investor makes comes with a degree of inherent risk, a successful trading strategy will seek to mitigate this risk in several ways.
Risk mitigation strategies vary depending on the type of trade you are making.
In this guide, we look at what forex spread betting is, some of the best forex spread betting companies to place trades with, and some tips to help you mitigate the risk when using spread betting to trade forex.
What Is Spread Betting?
Spread betting is a form of market speculation, whereby traders speculate (bet) on the direction a financial market will take (increasing or decreasing in value) without ever owning the underlying security.
Instead of buying a security at an advantageous time and selling it when it is worth more, the trader is betting on whether that security will increase or decrease in value.
There are two important numbers traders need to know when spread betting; the bid and the ask price, sometimes known as the spread.
When investors place a spread bet, they bet whether the price of a security will end up lower than the bid or higher than the ask.
- Spread betting makes short selling much simpler. If an investor wants to short physical shares, they will have to borrow the stock they want to short sell. This can be time-consuming and costly, whereas placing a spread bet is as easy as buying any security.
- In most cases, there are no commissions to pay on spread bets. Spread betting companies make their money through the spread they offer, rather than charging traders a commission fee. This makes it easier to stay on top of your trading costs.
- Some jurisdictions, including the UK, class spread betting as gambling. This means that any gains you make will be tax-free.
Using Spread Betting To Trade Forex
Forex spread betting uses the principles of spread betting and applies them to the forex market.
Investors bet on the price movement of currency pairs rather than securities. As with regular spread betting, traders will be quoted a bid and ask price by the company offering currency spread betting.
They then have to decide whether they think the currency pair’s price will end up lower than the bid or higher than the ask.
The difference between the bid and the ask is the spread. The narrower this difference is, the more attractive the currency pair is. A narrower spread means lower transaction costs and greater profits.
One of the key advantages of forex spread betting is that it enables traders to harness the concept of leverage when they place a trade.
Leverage means that the brokerage firm or platform processing the trade lends the investor the funds they need. Instead of covering the full costs of the spread bet, investors only need to meet the margin requirements.
The margin will be a percentage of the overall value of the bet.
As long as the investor can afford this, they can leverage the rest of what they need from the broker.
As with regular spread betting, forex traders using spread betting do not ever own the currencies they bet on. They are speculating on price movements.
Forex Spread Betting Tips
- Before you even think about placing a spread bet on the forex market, make sure that you fully understand what spread betting means and what you are doing. As with any investment or trading opportunity; the more you know beforehand, the better prepared you will be.
- Forex spread betting is regarded as gambling in the UK, like other forms of spread betting. But that doesn’t mean there’s no strategy to it or that it all comes down to random chance. Before you start spread betting, it is worth taking the time to learn about the factors that impact currency valuations and can affect the relative values of currency pairs.
- Consider putting together a formal trading plan that sets out how you will approach the forex market and how you will evaluate potential spread bets before you place them.
- Take sensible risk management precautions. You should never invest or bet money that you can’t afford to lose. Before you start trading, you need to know exactly how much capital you have available and how much you can afford to spend and lose.
Set yourself firm limits and make sure you don’t exceed them.