The world of financial trading has grown rapidly in recent years in terms of the numbers of people participating, primarily because online brokers make things so easy now. However, there’s one particular method of forex speculation that’s really helping things to grow, and it is of course spread betting. Many thousands of people are getting involved to make more money, whether it’s just a little on the side, or a full time occupation. But what is it, how does it work, and is it safe?
Good to Know
Firstly, it’s important to note that spread betting is a little different from other forms of financial trading for a couple of reasons. The first is that it is a derivative product. This means that it’s derived from the value of a particular currency (or commodity, metal etc.), but you never actually own that underlying asset when you make trades. You’re just moving money based on these assets. You can read a little more about the difference between spread betting and normal trading here.
The second important point is that financial spread betting is often classed as gambling rather than an investment, which has two implications. In the case of the United States, it’s actually not permitted at all. In the UK however, we have the fantastic benefit of spread betting not actually being taxable unless you’re earning a living wage from it.
The Basics
So, the ins and outs of spread betting are fairly simple – what you’re doing is wagering a particular amount of money for every point that a currency pair moves in the direction that you choose. So if you think that the pound is going to gain against the dollar, then you might bet £10 for every 0.01 that that this actually happens.
The word ‘spread’ refers to the gap between the buy and sell prices of the currency. This is usually a few points difference, and you don’t start earning a profit until the price moves past the buy or sell price, depending on whether you’re speculating on the price rising or falling. This ‘spread’ is where the brokers make their money.
Spread betting then is a good way of getting into financial trading, because it’s not too difficult, and you don’t need very much to get started. Some online brokers will let you bet pennies per pip, which makes things very attractive indeed.