The 5 core differences between Spread Betting and Forex Trading
If you are new to the financial marketplace, you may well be overwhelmed by the sheer range of segments and derivatives available to traders. This has grown exponentially over the course of the last decade, as technological advancement and the emergence of online brokerage firms have eradicated many of the historical barriers to the financial markets. As a result, individual traders with just a small amount of capital and limited experience can now execute effective, real-time orders.
While online brokers and virtual trading platforms have created numerous opportunities for traders, they have also caused some confusion among investors who have yet to refine their portfolio. Outlets such as ETX Capital offer investors’ access to a huge range of products within a single online space, for example, from spread betting to complex entities such as forex trading.
Appraising the differences between Spread Betting and Forex Trading: 5 Key Points to consider
The issue is that while there are several core differences that help to distinguish practices such as spread betting from forex trading, novice investors can find it difficult to readily identify these similar, derivative entities. With this in mind, here are five crucial and strategic differences between these two trading vehicles that you must understand if you are to be successful: -
- Spread Betting offers Superior Leverage to Investors
In simple terms, forex trading is the process of buying or selling one currency in exchange for another, whereas spread betting enables you to place a simple wager on the performance of a chosen currency pair. In this respect, spread betting is a far more suitable trading vehicle for beginners as it offers greater leverage to investors and optimises the accessible return on any given trade. Leverage is the term used to describe borrowed funds, so spread betters can wager more and drive higher, margin-based returns.
Given this and the simplified nature of spread betting, this is an important point for novices to keep in mind. It is important that you take steps to understand the underlying nature of leverage before making a commitment; however, as otherwise you will be unable to capitalise and optimise your profitability as a trader.
- Spread Betting Tax Free for UK residents
As a general rule, any money generated by trading, buying and selling currencies is subject to capital gains tax (CGT). If you speculate on forex you can be taxed on any generated income in excess of £10,000, so it is crucial to keep track of your earnings and manage your accounts in explicit detail.
Spread betting in the forex market has an entirely different classification in the UK market, however, as it is technically considered to be a form of gambling and is therefore ineligible for CGT. With this in mind, anyone with a desire to enter the forex market and optimise their profitability would be wise to consider spread betting.
- Spread Betting offers you access to a wider range of markets and Derivatives
On a fundamental level, forex trading offers you access to the foreign exchange and margin-based currency trades. This is a highly liquid and profitable market, although it is extremely narrow in its focus and restrictive in terms of the sheer range of segments, products and derivatives that it makes available to investors.
In contrast, spread betting is far broader in its scope and offers traders access to a huge range of individual financial markets. These include indices, stocks and the forex market, so there is ample opportunity for you to diversify your trading portfolio and optimise your profitability in a live, market environment. If you are still finding your feet in the financial market to struggling to create a focused strategy, spread betting is far more beneficial in terms of the choice and flexibility that it offers.
- There is no need to need to Trade directly with others when Spread Betting
The core advantage of spread betting is that there is no direct trading that takes place, as investors simply bet on the particular course that their chosen currency pair (or pairs) will take during a session. This reduces the risk of slippage, while it also negates the need to have an offer or exchange accepted by another party.
This is ideal when scalping, which refers to the real-time practice of executing multiple trades in a bid to profit from small, sudden price shifts. This is far more difficult when forex trading, as this practice involves direct trading and the corporal exchange of one currency for another. This is certainly something to keep in mind, although its importance depends on your precise philosophy and whether you are interested in short or long-term gains. In general terms, however, spread betting is a more flexible trading vehicle that enables investors to react quickly and adroitly to sudden market shifts.
- Access lower Spreads through Spread Betting than traditional forex platforms
In currency trading, the ‘spread’ refers to the difference between the price that a market-maker is prepared to pay and the cost at which he is looking to sell. This is changeable throughout the course of the real-time market, and it remains a highly influential factor when determining the profitability of individual trades. Forex platforms typically apply higher spreads in the market, which can be oppressive to short-term traders or scalpers.
In contrast, spread betting platforms are usually able to deliver lower spreads on a consistent basis to investors. This reduced spread also correlates into greater liquidity for traders, who can easily convert assets such as currency pairs into cash during the course of the live market. Given the real-time nature of the foreign exchange and currency price fluctuation this represents a huge Godsend, and one that can empower the value of short-term trades and execution.
Ultimately, your choice of trading platform and investment vehicle is inherently personal, and one that depends largely on your philosophy, underlying strategy and precise goals as an investor. These factors can all influence your decision; however, while they also provide a foundation of knowledge from which you can trade profitably.