Forex spread betting is another way of trading currencies. It is tax-free and this is the greatest advantage for traders. It is simply speculation of price movements, either upward or downward, of a currency pair. If it is assumed the price of a currency would rise, a trader opens a buy or long position. If a decline in value is expected, it is better to open a sell or short position.
The underlying asset is not owned in forex spread betting and no capital profit happens. This is the reason no tax is levied. It is a unique strategy that helps to gain even when the prices of currencies move downward.
Spread is basically the difference between the buy and sell prices of a currency. Traders usually prefer opening positions for such currency pairs which have tighter spreads. This helps them open and close positions quickly and simultaneously to keep the cost of transactions low.
A trader needs to gain ample knowledge about it before opening the first position. It is important to note that the forex market turns very volatile often and this is the reason it is advised to learn the basics before stepping into forex trading. A proper trading plan is required to build up entry and exit strategies.
Spread betting involves leverage which means a small capital is required to open a comparatively large trade to magnify profit. However, it comes with high risks. The loss is similarly magnified and may result in more than the deposit amount.
Spread betting is different from spot forex. It is the speculation of price movements of currencies while spot forex refers to the buying and selling of the currency pairs at spot price or current price.
Many brokers in the spot forex segment charge tax as it involves ownership of the currencies. In spread betting, no ownership of currencies is involved and hence no tax is levied on the profits.
Spread betting is similarly different from CFDs. Trading CFDs involve paying capital gains tax as well as paying commission to the broker if profits are made.
Spread betting is not as widely made available as in Ireland and the United Kingdom. Experts suggest considering CFDs in such countries where spread betting is prohibited.
What is Forex
Forex is the acronym for foreign exchange and it is the largest financial market in the world with a daily turnover of more than $6 trillion. It is a 24-hour global marketplace from Monday to Friday. It is best suited for those who want to make some extra earnings while continuing with their day job or profession.