Our team has designed a guide to help make sense of spread betting, forex, and CFDs to help you choose which trading technique is best for you. This includes exploring the taxi implications for UK residents, the level of risk, and the regulatory environment. We also have a resource with the best spread betting brokers if you choose this trading option.
What Is Financial Spread Betting?
Spread betting is a type of financial betting that allows you to speculate on the price movement of financial instruments, such as stocks, indices, currencies, and commodities across global markets. It is a way to speculate on the direction of market prices without actually buying the underlying asset.
In traditional spread betting, you bet on whether the price of an asset will rise or fall. For example, let’s say you think the price of a particular stock will go up. You could place a “buy” or “long” bet, which means you are betting that the stock’s price will increase. If the stock’s price does indeed go up, you will profit from your bet. If the stock’s price goes down, you will lose money on your bet.
Here is an example of how traditional spread betting works:
- You think the price of a stock will go up, so you place a “buy” or “long” bet at a spread betting firm.
- The firm offers you a spread, which is a range of prices at which you can place your bet. For example, the firm might offer a spread of £100-£105 for the stock.
- You decide to place a bet of £10 per point within the spread.
- The stock’s price increases from £100 to £110 over the course of the day.
- You have made a profit of £10 x (110 – 100) = £100 on your bet, minus any fees or commissions charged by the spread betting firm.
What Is Spread Betting?
Forex spread betting is a type of currency trading that allows you to speculate on the price movement of foreign exchange rates. It is a way to speculate on the direction of exchange rates without actually buying or selling currencies.
In forex spread betting, you bet on whether the exchange rate between two currencies will rise or fall. For example, let’s say you think the exchange rate between the US dollar and the euro currency pair will go up. You could place a “buy” or “long” bet, which means you are betting that the exchange rate will increase. If the exchange rate does indeed go up, you will profit from your bet. If the exchange rate goes down, you will lose money on your bet.
Here is an example of how forex spread betting works:
- You think the exchange rate between the US dollar (USD) and the British pound sterling (GBP) will go up, so you place a “buy” or “long” bet at a spread betting provider.
- The firm offers you a spread, which is a range of exchange rates at which you can place your bet. For example, the firm might offer a spread of 1.20-1.25 for the exchange rate.
- You decide to place a bet of £10 per pip within the spread. (A pip is the smallest unit of price movement in the forex market.)
- The exchange rate increases from 1.20 to 1.30 over the course of the day.
- You have made a profit of £10 x (1.30 – 1.20) = £100 on your bet, minus any fees or commissions charged by the spread betting firm.
It is important to note that spread betting on forex is not the same as trading forex on a spot market, as the terms and conditions of the two types of transactions are different. To better understand spread betting have a read of our what is spread betting forex guide for a high-level overview.
What Is Forex CFD Trading?
Forex CFD (Contract for Difference) trading is a way to speculate on the price movements of currency pairs without actually owning the underlying asset. CFDs are financial derivatives that allow you to take a position on the price movement of an asset, such as a currency pair, without actually buying or selling the asset itself.
Here is an example of forex CFD trading in GBP (British Pound):
Let’s say you think the GBP/USD currency pair is going to rise in value. You can open a long (buy) position on the GBP/USD currency pair using a CFD. If the market moves in your favour and the GBP/USD currency pair rises in value, you can then close your position and realize a profit. On the other hand, if the market moves against you and the GBP/USD currency pair falls in value, you can close your position and realize a loss.
In forex CFD trading, you only need to put up a small percentage of the value of the trade as margin, which is a type of collateral that is required to open and maintain a position. This means that you can trade larger positions with a smaller amount of capital, but it also means that your potential losses can be greater than your initial investment.
We made a full spread betting vs CFD guide if you are looking to understand more of the differences between these trading strategies.
How Is Spread Betting Different from Forex CFD Trading?
Forex spread betting and forex CFD (Contract for Difference) trading are two different ways to speculate on the price movements of currency pairs, and they have some key differences.
1. In spread betting, you are purely betting on the price movement of a financial instrument – in other words you neither own the underlying instrument or a even own contract representing the value of the underlying instrument. Since you don’t hold any form of assets, any profits you earn are not subject to capital gains taxes. CFD trading means you own a contract to buy or sell a financial instrument at a certain price, which not only means you profits are subject to capital gains taxes but you can also claim tax deductions on any losses.
2. Both spread betting and CFD trading allow you to trade with leverage, which means that you can control a large position with a smaller amount of capital. However, the amount of leverage available can vary between different brokers and may be subject to regulatory restrictions.
3. You can also use different types of orders to enter or exit trades when spread betting. For example, in spread betting, you can use stop-loss orders and limit orders to manage your risk and take profits, while in CFD trading, you can use orders such as stop orders, limit orders, and stop-limit orders.
4. Another potential difference is the spread, which is the difference between the buy and sell price of a financial instrument. While both are based on the price of the underlying instrument, spread betting does not have commission costs so will different from a CFD account using RAW spreads + commissions.
Should I Try Spread Betting or Financial Spread Betting?
Ultimately, the decision between forex spread betting and financial spread betting depends on your individual circumstances and financial goals. Both types of spread betting involve significant risks and can result in significant losses, so it is important to understand the risks and have a solid understanding of financial markets before engaging in any form of spread betting.
When deciding which form of spread betting to pursue, consider the following:
1. Knowledge and experience: Do you have a strong understanding of the forex market or the financial markets in general? Beginners may want to start with traditional spread betting, as it may be easier to understand and less risky than forex spread betting.
2. Risk tolerance: Spread betting carries a high level of risk, and both forex and traditional spread betting can result in significant losses. It is important to carefully consider your risk tolerance and financial goals before deciding which type of spread betting is right for you.
3. Accessibility: Some spread betting firms may only offer one type of spread betting, so it may be easier to access one type over the other.
When it comes to financial spread betting the most popular areas of trading include the FTSE 100, currencies and indices.
Should I Spread Bet or Trade Forex CFDs?
Spread betting and trading forex contracts for difference (CFDs) are both ways to speculate on the price movement of financial instruments, but they have some important differences that you should consider before deciding which is right for you.
Here are some things to consider when deciding between spread betting and trading forex CFDs:
1. Risk tolerance: Spread betting is generally considered to be a higher risk activity than trading forex CFDs, as the value of your bet can fluctuate rapidly based on market conditions. It is important to carefully consider your risk tolerance and financial goals before deciding which is right for you.
2. Tax implications: Spread betting is generally tax-free in the UK and Ireland, while profits from trading forex CFDs may be subject to capital gains tax. This can be an important consideration if you are based in one of these countries.
3. Leverage: Both spread betting and trading forex CFDs allow you to use leverage to increase the size of your trades. However, the amount of leverage available may differ depending on the broker and the type of instrument you are trading. It is important to carefully consider the amount of leverage you are using and the risks involved.
4. Regulation: Spread betting firms are generally regulated by gambling authorities, while derivatives brokers are typically regulated by financial authorities. This can be an important consideration if you are concerned about the safety of your funds or the integrity of the firm you are dealing with.
It should be noted that where you plan to trade should also be considered. For example, many individuals need to trade on their phone so they should be reviewing the best spread betting apps before making their final decision.
Trading on Margin in Forex Spread Betting
In spread betting, margin trading refers to the use of borrowed funds from a broker to increase the size of a trade. When you trade on margin, you are essentially borrowing money from your broker to make a larger trade than you would be able to make with your own capital alone.
Margin trading allows you to leverage your capital and potentially make larger profits, but it also carries a higher level of risk. If the trade does not go in your favor, you may be required to pay back the borrowed funds, plus any interest or other fees charged by the broker. This can result in significant losses if the trade moves against you.
Here is an example of how margin trading works in spread betting:
- You want to place a bet on a stock that is currently trading at £100 per share, but you only have £500 in your account.
- Your broker offers you the option to trade on margin, with a margin requirement of 50%. This means you can borrow up to 50% of the value of your trade, or £500 in this case.
- You decide to use margin and place a bet on the stock worth £1,000. You put up £500 of your own capital and borrow the remaining £500 from the broker.
- The stock’s price goes up to £110 per share, and you decide to close your position.
- You have made a profit of 1,000 x (110 – 100) = £1,000 on your bet, minus any fees or commissions charged by the broker. You also need to pay back the £500 you borrowed, plus any interest or other fees charged by the broker.
It is important to carefully consider the risks and benefits of trading leveraged products before using margin to amplify your positions. It is also important to choose a reputable and trustworthy broker and to carefully read and understand the terms and conditions of any margin agreement.
Risk Management in Spread Betting
Most reputable spread betting providers offer a number of tools to help you manage your risk and prevent significant losses when trading. While there is no guarantee of success in this kind of trading, you can reduce the likelihood of financial difficulty by only betting with money you can afford to lose, educating yourself about the financial markets, and making use of any educational resources published by your brokerage.
In addition to practising good sense, these tools can help you to control your potential losses and maximize your profits:
1. Stop-loss orders: This is a type of order that automatically closes your trade at a predetermined price level, either above or below the current market price, depending on the direction of your trade. For example, if you are long (buying) a currency pair and you want to limit your potential loss, you can set a stop-loss order at a lower price level. If the market moves against you and the currency pair hits your stop-loss price, your trade will be closed automatically, limiting your loss to the size of your stop-loss.
2. Limit orders: This is a type of order that allows you to specify the price at which you want to enter or exit a trade. For example, if you are long (buying) a currency pair and you want to take profit at a certain level, you can set a limit order at that price. If the market reaches your limit price, your trade will be closed automatically, realizing your profit.
3, Trailing stops: This is a type of stop-loss order that adjusts itself automatically as the market moves in your favour. For example, if you are long (buying) a currency pair and you want to lock in some of your profits as the market moves in your favour, you can set a trailing stop at a certain distance from the current market price. If the market moves in your favour and the currency pair rises, your trailing stop will also rise, locking in more of your profit. If the market then turns against you and the currency pair falls below your trailing stop, your trade will be closed automatically, protecting your profit.
4. Risk-reward ratio: This is a way to measure the potential profit of a trade relative to the potential loss. It is calculated by dividing the distance to your profit target by the distance to your stop-loss. For example, if you are long (buying) a currency pair and you have a profit target of 100 pips and a stop-loss of 50 pips, your risk-reward ratio is 2:1 (100/50). This means that for every 1 pip of potential loss, you have the potential to make 2 pips of profit. A higher risk-reward ratio indicates that the potential profit of the trade is greater relative to the potential loss, which can make it a more attractive trade.
How Do I Start Betting on Forex?
Beginner bettors may opt to open a demo account before fully committing to a spread betting broker in order to learn more about trading platforms and risk management tools. Demo accounts are also an excellent way to experiment with forex trading and financial spread betting, or to test betting strategies.
For more knowledgeable or experienced traders, the process of opening a spread betting account or forex trading account will follow these steps:
1. Choose a spread betting firm or forex broker
There are many spread betting providers and UK based forex brokers offering retail investor accounts, so it is important to do your research and select a reputable and trustworthy firm that meets your needs. Consider factors such as the firm’s reputation, available trading platforms, the types of instruments offered, the available spreads, and any fees or commissions charged.
2. Complete an application
Most spread betting firms will require you to complete an online application form to open a spread betting account. This may include providing personal and financial information, such as your name, address, and employment status. You may also be required to provide identification documents, such as a copy of your passport or driver’s license.
3. Select a trading platform
The main factor that impacts the software that UK traders can use when financial spread betting is the broker they choose. The most popular trading platform is MetaTrader 4 which is owned by MetaQuotes. Most brokers offer this trading platform and we have compared the best MT4 spread betting brokers. Other popular trading platforms include MetaTrader 5 and cTrader.
4. Open and fund your spread betting account
Once your application has been approved, you will need to make a minimum deposit in order to start spread betting. This can typically be done by making a bank transfer or using a credit or debit card.
5. Start spread betting trading
Once your account is funded, you can start spread betting by placing a bet on the instrument of your choice. Be sure to carefully consider the risks and have a solid understanding of financial markets before placing any bets.
We recommend the Pepperstone spread betting account based on its fees, trading platform, and customer service levels. If your looking for more information on getting started then view our how to start spread betting page.
Is Spread Betting Legal in the United Kingdom?
Financial spread betting is legal in the UK and regulated by the FCA. Sports spread betting is also legal in the UK and regulated by the UK Gambling Commission, which is the national regulatory authority for gambling in the UK.
The UK Gambling Commission is responsible for regulating all forms of gambling in the UK, including online and offline gambling, to ensure that they are conducted in a fair and responsible manner. This includes ensuring that spread betting firms hold appropriate licenses and follow strict rules and regulations to protect consumers.
Do I Pay Tax on Spread Betting Earnings?
In the UK, spread betting is generally considered to be tax-free. This means that you do not have to pay income tax, stamp duty or capital gains tax on your profits. However, it is important to note that this tax treatment applies only to spread betting and not to other forms of financial trading or gambling.
It is important to accurately report your earnings from all sources, including spread betting, on your tax returns and to comply with all relevant tax laws. Failure to report your spread betting profits could result in penalties and fines.
The UK’s Financial Conduct Authority (FCA) warns that spread betting carries a high level of risk. Spread betting may not be suitable for all investors, and you should ensure that you fully understand the risks involved before trading. The FCA also warns that leveraged products, such as forex trading and spread betting, are not suitable for all investors as they carry a high degree of risk to your capital.
You should carefully consider your investment objectives and level of experience before deciding to trade forex or engage in spread betting. If you are uncertain about the suitability of these products for you, you should seek independent financial advice.