What is the difference between regular forex trading and spreadbetting on the market?
With the economy struggling to achieve and sustain any growth, making a profit from stocks and shares has been increasingly challenging for investors. As a result many are turning to alternative markets, such as foreign exchange currency trading – forex – for the opportunity to make the most of volatile economic conditions. However, it isn’t just forex trading which has seen a surge in popularity; the practice of spread betting on forex is also becoming increasingly common.
But what is the difference between regular forex trading and spreadbetting on the market?
Spreadbetting in any form is free of Capital Gains Tax and also free of Income Tax for the majority of people, a significant advantage over regular trading. However, this also means that it is not possible to offset losses against any profits made to reduce Capital Gains Tax in other areas.
Spreadbetting on forex is very similar to “proper” forex trading in many ways. In both, the trader has the option of taking a long or short position; an unparalleled benefit allowing traders to profit even if the economy is heading south.
The fundamental difference is that with spreadbetting, the underlying commodity is never owned. This means that no matter how much money is poured into a position, the individual is only ever betting on the price movement, not profiting from a change in the price of currency they have purchased. And this underlines the biggest contrast; spreadbetting is technically a form of gambling rather than pure investing.
In many cases, not actually owning the currency will have no bearing at all on your position, nor the profits you make so may not be of consequence. However, if you are planning on holding the trade open for long periods or are considering using the currency to make purchases elsewhere, spreadbetting may not be able to offer you what you need.
Spreadbetting is excellent for short term positions and can be a good way for scalpers to profit from the market. It can also be more suitable for smaller investors as the requirement to hold significant amounts of capital is not as common. However, it is essential to make sure you have sufficient money in reserve in your spreadbetting account as margin calls are still possible and you will not want your position closed automatically.
The other factor to bear in mind is that spreads can vary far more in spreadbetting compared to trading. This is because they are basically set by your broker who is trying to make a profit from you. And to do this you will not be offered the best rate compared to the market price.
Despite the many contrasts between spreadbetting and trading in forex, the skills involved in accurately predicting how the market is likely to move are the same. The same type of in-depth analysis is required and the use of forex signals and other technical data is essential for both types of investor in order to maximise their chance of making a profit.