Spread betting on forex markets is a flexible and tax-beneficial way to trade on the movement of a forex pair without the requirements to own the currency. We explore the concept and explain how to financial spread bet in the UK below.
CONTENTS
Key Takeaways
- Financial spread betting is (mostly) only legal in the UK
- Spread betting on forex markets allows a trader to predict specific currency movements without owning the foreign exchange
- The direction, size and spread are the key components of a financial spread bet
- Leverage is used in spread betting to increase exposure. It helps make modest movements of financial markets more profitable (or costly)
- Spread betting is tax-free in the UK
- You should only choose an FCA regulated broker if you are in the UK
Understanding Forex Spread Betting
Spread betting is a way of attempting to profit off the movements of an asset without owning the asset. Profits occur when you (as a bettor) accurately predict the price will move in the direction you expect. Forex spread betting specifically refers to the use of Forex currency pairs as the derivative you speculate on when making a spread bet, this means the spread price comes from the underlying instrument.
One of the key factors that will determine how much you stand to win or lose is the stake size. This stake is typically stated as ‘pounds per point’ (i.e. £0.10 per point) when betting on financial instruments such as forex, indices and commodities. You make a profit (or loss) on each unit of movement that you have placed a stake on.
1. Spot forex vs. spread betting trading
Spot forex and spread betting are two ways to trade financial markets, but there are some key differences to be aware of.
The use of spot forex when trading is where you are buying and selling the currency at the market price on the spot (hence the term spot). Trading using spot products (in this case forex), means you become the owner of the underlying asset. These Financial spot products use pips as the measure of their value.
Spread betting is similar to spot forex trading in that you can profit from the direction of the underlying asset the difference is you do not own the asset. Instead, you are making a bet with the broker that the underlying asset will move in a particular direction, which allows you to profit from your entry and exit price. When prices move in the direction of your bet, there will be no capital gains taxes on your profits.
Unlike spot products which are measured in pips, bets are measured in points. Since your base currency will always be in British pounds (rather than USD, AUD, EUR etc.) when spread betting, you will be betting on how many pounds per point the market will move. Using GBP as your base currency means there is no need to convert into other currencies such as US dollars or Japanese Yen (JPY) which is a cost in itself.
| Feature | Spot Forex | Spread betting |
|---|---|---|
| Ownership of the asset | Yes | No |
| Fees to trade | Commissions and spreads | Spreads only |
| Tax implications | Capital gains tax | No capital gains tax |
| Currency conversion fees | Yes | No |
| Availability | Worldwide | UK |
2. CFD vs. spread betting trading
Contract for Difference (CFDs) and spread betting are popular ways to trade the markets as a retail trader. CFDs offer the same trading opportunities when it comes to speculating on price movements as spread betting.
As the name suggests, a CFD means, you are buying into a contract and agreeing to pay the difference between the open price and the closing price of an underlying instrument. CFDs are a type of leveraged derivative product used worldwide (except in the US) to trade all types of financial markets. This type of trading is especially popular with retail traders since it can be done at home via an online broker and an internet connection.
Spread betting is pretty much the same as the CFD derivative product when it comes to allowing you to profit from the underlying asset. However, the key differences are that spread betting is limited to UK citizens, and you do not pay capital gains tax on your profits. While you will not need to pay a capital gains tax, unlike with CFDs, you will not be able to offset losses for tax returns.
Below is a summary of the differences between spread betting vs CFD trading.
| Feature | CFDs | Spread betting |
|---|---|---|
| Ownership of the asset | No | No |
| Fees to trade | Commissions and spreads | Spreads only |
| Tax implications | Capital gains tax | No capital gains tax |
| Availability | Worldwide | UK |
3. Spots vs. forwards vs. options
As a trader, you are never short on ways to speculate on the markets, especially with derivative trading.
Spot forex is the underlying asset to both forwards and forex options. Depending on how the underlying market is doing, it will affect forward and forex option contracts.
Forwards are contracts to exchange currencies at an agreed rate and date in the future and work in a similar way as spot forex trading. Although you can speculate with forwards, they are geared toward businesses that need to hedge against currency risk.
Options, on the other hand, provide traders with greater flexibility and manage risk compared with spot forex and forwards, but they are more complicated to learn. Options are contracts that give you the right (but not the obligation) to buy or sell an asset at a predetermined price on or before a certain date.
Forwards by contrast means you are obligated to buy or sell the agreed rate in the contract at a set date in future. Options allow you the choice to buy or sell at the agreed rate in future. Because of this extra flexibility, you pay an extra premium compared to Futures.
| Feature | Spot forex | Forwards | Options |
|---|---|---|---|
| Ownership of the asset | Yes | Contract to buy/sell in the future | Right to buy/sell in the future (but no obligation) |
| Settlement date | Immediate (on the spot) | On a future date | On a future date |
| Price | Current market price | Forward price in the future | Strike price |
| Risk | Market volatility | Market volatility | Limited to premium |
| Liquidity | High | Low | High |
How To Spread Bet On Forex?
Now that you possess the proper knowledge base for spread betting, you might be thinking it’s time to dive into the markets. Your initial step should be to open an account with a reputable spread betting provider, and you should find the right one by browsing this site.
Joining a forex spread betting broker
Opening a UK spread betting account for most people, is a very quick and painless process. You often just need to upload a few documents to prove your identity, and then make a deposit into your betting account by one of the funding methods the broker accepts such as bank transfer, debit or credit card and in some cases by using a digital wallet.
It’s important to keep in mind that any form of financial trading has the potential for financial losses. For this reason, it is a good idea to minimise financial risk with a well-thought-out risk management plan, including the use of position sizing and by activating a stop-loss.
Here are some of the major things to look for when spread betting:
1. Trading Tools and Features
When selecting a spread betting company, it is important to consider the available trading tools and features they offer.
Look for a charting platform that you’re comfortable using and one that offers the particular trading indicators and chart-marking tools that you like to use.
The order-entry platform is also important, especially if you’re a rapid day trader. Look for an order-entry platform that is easy to use, and lets you enter trades easily and efficiently.
2. Fees and Commissions
When selecting a spread betting platform, minimising fees and expenses plays a big part in your overall profit potential. Look for a broker with tight spreads.
Seeking out less expensive platforms could help you get the most return for your efforts while reducing financial costs. It’s a good idea to explore broker comparisons on this site to find a spread betting platform that works best for you.
3. Regulation and Security
It’s important to make sure that the platform you choose is regulated in a jurisdiction that provides safety for your deposit.
In the UK, all platforms must be compliant with regulations set by the Financial Conduct Authority (FCA). These regulations provide strong protections for retail investor accounts.
4. Select a Spread Betting Platform
Some spread betting brokers allow you to choose from a number of trading platforms to spread bet with, others only offer you one. MetaTrader 4 (MT4) is one of the most popular trading platforms, especially for betting currencies while MetaTrader 5 (MT5) is a better choice for betting a wider number of underlying assets from commodities to shares. You may wish to view our best spread betting apps page should you wish to be mobile when betting.
Look for trading platforms that have that fit your trading style. If charts and analytics are important to you then take a look at the TradingView platform.
Before you sign with a spread betting provider. It’s a good idea to sign up with a spread betting demo account to test out the account. This will allow you to test the broker and platform out without risking your capital.
5. Define the Leverage
Spread betting involves the use of leverage and margin. Leverage enables you to open a spread bet position using a smaller amount of your capital and is expressed as a ratio. Margin is much the same as leverage but is expressed as a percentage.
6. Select the Currency Pair to Spread Bet
Most brokers will have a solid selection of currency pairs for you to spread bet with. Simply view their range of markets and select the forex pair you wish to trade.
7. Monitor your Position
Each UK spread betting broker has a minimum deposit requirement which ranges from £0 to £1,000. Any FCA-regulated spread betting broker has negative balance protection so you can’t lose more than your deposit. We recommend therefore only depositing the amount you’re willing to lose. For the record, our analysis of the best brokers found Pepperstone was the best and you can view our full Pepperstone spread betting review page.
Managing Risk In Spread Management
As with trading of other financial products, such as the spot FX market and futures, there are a few steps traders should take to try and increase their odds of success.
A few of these steps are:
1. Developing a Trading Plan
A trading plan is a set of rules related to entering and exiting trades, as well as how much risk they’re willing to take on any particular trade
Crafting an effective trading strategy should also include keeping track of how well the plan is doing and making adjustments if and when necessary.
By following this type of strategic framework traders can remain focused on their goals thus minimizing haphazard choices triggered by emotions or inaccurate information which may lead to losses.
2. Stop-Loss Orders
Stop-loss orders are valuable tools for managing risk in spread betting.
They will close your trade if the price moves against you by a number of points that you’ve determined.
This helps contain losses and safeguard profits, preventing you from blowing large parts of your capital. It’s important to be aware of market volatility since stop levels may not always trigger due to gaps or fluctuating prices.
Who Are The Best Spread Betting Brokers?
There is a good selection of forex brokers in the UK that offer spread betting. Below, our analysts have selected the best spread betting brokers:
1. Pepperstone
In my experience, Pepperstone leads the pack when it comes to low spreads. They also offer a diverse range of trading platforms, including the ever-popular TradingView, which I find incredibly useful.
2. City Index
If you’re like me and prefer using MT4, City Index is a top pick. Their spreads are tight, which is a big deal when you’re looking to maximise profits.
3. IG Trading
For those just starting out in spread betting, IG is my go-to recommendation. Their platform is not only intuitive but also comes loaded with a variety of trading tools that I find invaluable.
4. FXCM
When it comes to spread betting on shares, FXCM is my choice. They offer a wide range of popular shares, and their stock trading fees are impressively low.
5. FxPro
If you’re keen on risk management like I am, then FxPro should be on your radar. They offer a range of tools that can help you trade more cautiously.
6. CMC Markets
For traders who want a broad range of markets to bet on, CMC Markets is my top recommendation. Their technical analysis tools are also top-tier, which I find extremely helpful.
7. SpreadEx
What sets SpreadEx apart for me is the ability to trade both financial and sports spread bets. It’s like having the best of both worlds at your fingertips.
8. ThinkMarkets
If you’re someone who likes to trade on the move, ThinkMarkets has a user-friendly mobile app that I find very convenient for spread betting.
9. Markets.com
For those who want to get their feet wet without diving in, Markets.com offers a solid demo account. It’s a great way for me to practice strategies before going live.
Spread Betting FAQs
What Tips Help Forex Spread Betting?
Spread betting offers a very quick and easy way to start betting on financial markets. Sign-up requirements are usually minimal which means you can be betting on financial products such as Forex, shares and indices within a day.
Before you sign up with a broker, make sure you test out some trading platforms to find one you will be comfortable using. Another tip is to look for a broker that includes some betting education as part of their offerings, Financial products such as Forex as complex and require you to have a good skill set if you wish to make profits so educate yourself before diving in. Lastly, think about how much leverage you intend to use, leverage can increase profits but also lead to large losses if price movements are unfavourable so only bet as much you can afford to lose.
Is Spread Betting Tax-Free?
UK tax laws do not require winnings from spread bets to be subject to capital gains or stamp duty taxes. This is because the financial regulator in the UK known as the Financial Conduct Authority (FCA) deems spread betting as gambling and not trading.
Still, we think it is a good idea to keep accurate records regarding earnings and losses. Tax regulations can change anytime, so it’s best to have a professional tax advisor. View our full tax spread betting guide for more details on the tax status of this type of derivatives trading.
Is Spread Betting Good For Beginners?
Everyone starts out as a beginner when they start their spread betting journey and it will be no different for you. As a beginners to spread betting there are some things to keep in mind, find a broker and trading platform you are comfortable with, look for a broker with low spreads, practice using a demo account, and educate yourself.
Another common alternative to spread betting for retail forex traders is CFD trading. As discussed earlier, CFDs and spread betting have many common characteristics in that they are both leveraged instruments with prices derived from the underlying instrument, so both of them do come with similar risks. One reason many choose spread betting over CFD trading is that there is no capital gains tax however CFDs do allow you to offset any losses on your tax returns.
At the end of the day, it’s best to demo trade to see how you get on because it’s all down to individual circumstances.