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Perhaps you have heard of the recent popularity of investing in foreign exchange currencies, currently the largest trading vehicle on the planet, in which a trillion and a half pounds is traded each day. Forex trading determines the relative value of global currencies: it has exploded in popularity due to the fact that it there are huge liquidity volumes and there is no conformity to usual daytime trading hours.
Each forex trade simply trades one currency against another, the most popular being the United States dollar and the pound. Another type of currency trading is called forex spread betting, a form of betting that is relatively similar in nature to sports spreads, in which theouitcome of a sporting event is predicted and bet upon.
Spread betting is based on the same type of mathematical principles as gambling in which the trader places his bet according to his perceived view of the market.
If the trader had placed a bet of one pound per pip, and the Euro fell ten pips against the USD, he will have won 10 pounds if he closed the trade down at that point, minus whatever rate the spread betting companies take as their share. If the market price had moved against the trade, ie the Euro had strengthend against the dollar, then the trader will have lost ten pounds The potential for unlimited losses and gains makes it vital that spread betters employ effective risk management strategies using a stoploss.
Many spread betting participants use a day trading approach in which intraday trades are made and any position is closed at the end of their day, not session because forex is a 24 hour market. Others will want to take a longer view of the market and use a position or swing trading approach in which trades are held overnight or for a number of days. In this case the spread betting company will charge them a fee for financing the bet. These interest charges can add up if large positions are held for a significant time.
A major difference between forex spread betting and currency trading is that a spread bet involves trading a derivative of the currency pair and the spread betting company can determine its own spread. In contrast a trader placing a position on the open forex market will actually be holding the underlying currency (unless he is shorting) and the spread is determined according to market dynamics. That said, spread betting companies are very highly regulated in the UK and have to meet stringent regulations to ensure fair play for their customers.
It is not surprising that spread betting has grown so fast when you realise that under UK tax law any gains are tax free, however on the flip side, losses cannot be offset against other gains. This is because spread betting is treated as gambling in the UK. Spread betting is also free of stamp duty because you don’t actually buy the underlying currency, you are merely placing a bet on the price movement of a derivative. It is estimated that over a third of all spread betting takes place in London.
With the size and liquidity of the foreign currency market to take advantage of and the tax advantages and efficient spread betting trading platforms, it is no surprise that make this form of trading is so attractive to UK investors. The potential for further growth as forex spread betting attracts more particpants is fuelling an increase in the number of spread betting companies, creating healthy competition between them that benefits the trader eager to try his hand in the forex market.
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Chris Ray writes about investing for a number of web sites. If you found this article about forex trading useful you might be interested in other aspects of spread betting at http://www.moneyhighstreet.com
