Difference Between FOREX Trading & Spread Betting

Foreign exchange trading (FOREX) draws many traders because of the great liquidity and leverage it offers. However, there is more than one way to invest in the FOREX market. While traders have traditionally opened accounts with FOREX brokers, there is also the option of opening an account with a spread betting firm. Spread betting firms only operate in the United Kingdom.

FOREX Trading

FOREX trading is the exchanging of one currency for another on the foreign exchange market. Individual traders must sign up with a FOREX broker in order to trade.

Spread Betting

Spread betting is a way to bet on currency movements without directly trading in the FOREX market. In spread betting, the participant chooses an amount of money to bet for each pip the currency pair (spread between bid and ask prices) rises or falls. Foreign currency rates are carried to four decimal points. A pip is the smallest increment a currency pair can move, which is 0.0001. For example, if someone bet $10 that a currency pair would go up and it went up four pips, the person would win $40 on the bet.

FOREX market

The FOREX market is the largest market in the world, and it also has the highest liquidity. Banks, large financial institutions and individual traders all participate in the FOREX market.

Spread Betting Market

Each spread betting company is a separate institution, so while the spread betting is based on the underlying FOREX market, it takes place entirely between the individual and the spread betting firm. However, this is not radically different from choosing a specific broker to trade the FOREX market.

Considerations

In both FOREX trading and spread betting, the bid/ask spread reflects a cost that the trader pays. The larger the spread, the higher the cost that the trader pays. Spread betting profits are not taxed in the UK.

Warning

Spread betting is illegal in the U.S. and many other countries.

References

• Comparing Spread Betting to Forex Trading