Forex Brokers Offering Spread Betting

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Another innovation in the financial trading space is the creation of a form of trading known as spread betting. This form of trading shifts the emphasis on the investment amount per trade and the difference between the entry and exit prices, taking into account the cost of the spread. This website features a list of forex brokers offering spread betting and allows you to try out an alternative form of trading.

What is Spread Betting?

Spread betting is a form of trading in the financial markets which is based on achieving a variation in price in a specific direction, based on a specific spread difference on the asset. It is a form of investment which is essentially tax-free. To put it another way, a spread bet aims to use a fixed amount invested to achieve a profit based on the price change that occurs from the trade entry to the trade exit.

How Spread Betting Works

Spread betting can be done on several assets. So when trading with a forex broker offering spread betting, there are options to spread bet on currencies, commodities and indices. But how does spread betting work? First, the trader must pick an asset to trade from the asset listing on the broker’s site. You may choose a stock as an example.

Next, the trader should select an investment amount per point to make an entry. You may also assume you are going long on a stock ABCD for 2.00 GBP per share. Since you are trading a stock, the pricing of the asset is in two decimal places. A pip move would be equivalent to 0.01 units of currency, or £0.01 in this example. Let us assume we want to invest £10 per point. Understand that spread betting is leveraged. So if you have a leverage of 1:20 (or 5% margin requirement), you must come up with just 5% of the trade amount. Since the trade amount is £10/point, your margin commitment to the trade will be £0.5 per point.

Next, decide how many units of the asset you want to buy, keeping the purchase amount within the acceptable risk management limits. If we buy 500 shares of stock ABCD, the upfront deposit for this trade will be 500 X £0.5 = £250. We will assume the spread cost is 2 pips.

Assuming the price of stock ABCD rises to £2.50, representing an increase of 50 points (2.50 - 2.00), the profit for the trade will be £10/point X 50 points, or £500. The spread cost is 2 points, which is £10/point, equating to £20.

The profit = £500 - (£250 + £20) = £230.

What is the Difference Between Spot Trading and Spread Betting?

The main difference between spot forex trading and spread betting is that spread betting emphasizes the amount invested per pip. Spot forex trading places more emphasis on a lot size and price direction. For instance, a forex spot trade will require a trader to choose trade sizes that are calibrated in lots. Except the trader knows how to calculate the monetary value of a tick move, it may not be obvious how much per pip is being aimed for as profits or paid as a spread.

Spread betting, however, allows the trader to set the investment amount per pip ab initio. This way, the trader knows in advance the spread cost and profit targets.

Spread Betting Features

What are the features of spread betting?

  1. Any profits from spread betting activity are not subject to capital gains tax or stamp duty.
  2. Spread betting is leveraged, so traders can use some money to generate more significant positions than would have been possible.
  3. Trades are based on the spread and require the trader to set an investment amount per pip when setting up the trade.

Setting up a spread bet involves the following:

  • A) Asset price direction.
  • D) Investment amount per tick.
  • C) Leverage (determines how much you put up as upfront cash deposit for the spread bet.
  • D) Risk management.

How are these four principles applied?

A) Asset Direction

Choosing a direction for the trade is a cornerstone of spread betting. The eventual profit or loss in a spread bet involves multiplying the investment amount per tick by the number of pips the asset eventually moves. The principles that govern the selection of asset direction are based on technical and fundamental analyses and work the same way as other investment types.

B) Setting the Spread Bet Investment Amount

Spread bets require the trader to set an investment amount per trade. This is done by setting the £/point. The forex broker offering spread betting will prompt the trader to enter the investment amount per pip/point for the trade. The different asset classes have different specifications regarding the minimum or maximum investment amount to be set per trade. This plays a role in risk management.

C) Leverage

Leverage considerations are Important as they will determine how much you can set as the investment amount per point. If your leverage is 1:50, you can set £1 as the investment amount and control £50 worth of a position on the trade. If you use a leverage of 1:50 on a spread bet at £20 per point, you will only have to come up with (1/50 X 100%) or 2% of the required investment. Since the value of the spread bet is £20 per point, you only need 2% of this amount. 2% of £20/point comes to an investment of £0.4/point.

D) Risk Management

Managing the risk in a spread bet is a function of determining the trade size within the context of the allowed leverage. A spread bet should not cost the trader more than 3% of the total capital. If the trader has an account size of £3000, the maximum investment for all trades must not exceed £90, which is what 3% of the capital comes to. Using the previous example for leverage, a position worth £0.4/point allows the trader to risk 200 pips as stop loss in a spread bet. If more trades are used, the number of trades is used to divide the risk factor to stay within risk tolerance limits.

Trading with Forex Brokers Offering Spread Betting: What You Gain

What benefits do you stand to gain when trading with forex brokers offering spread betting?

  1. Trades are bi-directional. You can profit from rising prices with buy positions or falling prices using sell orders.
  2. Spread bets are subject to the same principles of technical and fundamental analyses as other conventional spot trade types.
  3. You can spread bet assets from different asset classes.
  4. Your profits are not subject to capital gains tax or stamp duty charges.
  5. You get to know how much you are investing per trade, how much you risk as stop loss and how much you intend to profit.

Best Practices When Using Forex Brokers Offering Spread Betting

Maximizing returns on spread betting requires the trader to observe some best practices when trading. Some of the important ones are listed below.

A) Proper Risk Management

Risk management is at the very core of spread betting. Apply sound risk management principles to prevent your account capital from being decimated by a sequence of losing trades. Losses cannot be avoided. How your account weathers those losses and stays afloat to benefit from the gains is what makes the difference between consistently profitable traders and losing ones.

B) Ensure You Have a Well-Capitalized Account

A wel- capitalized account protects your capital from drawdowns and helps it handle periods of extreme market volatility.

C) Trade Assets You Are Familiar With

Do not try to trade everything when spread betting. Only spread bet assets whose fundamentals and price behaviour you are familiar with.

Conclusion

Spread betting is a tax-free form of financial market trading. On this website, we have a list of several forex brokers that offer spread betting as a form of trading. Go through the list and make your selection that suits your trading objectives.