Forex Spread Betting-Part 1

One of the key point that beginners in forex trading must know is understanding the term forex spread betting. This term and few other related terms are as much important as knowing the trading technique itself. We shall go in-depth of the meaning of the term which are widely use in general in the financial market & also in the forex trading.

Financial Spread Betting

One way of trading on a financial market or product such as a share or a commodity without having to physically own it is referred to as Financial Spread Betting.

In general, spread betting allows an investor, to bet on whether the price of a financial instrument will go up or will go down in value. For every point the market moves in the investor’s favor, it shows that the trader has won multiples of their stakes and vice versa, for every point it moves against the anticipated points, it shows multiples lost of their stakes.

The profit or loss is the difference between the buying and selling price. As we do not physically own the product, but solely bet on the price movements, we can profit from falling markets or widely known as bearish market as well as rising markets or also known as bullish market.

If we think that a certain financial market will rise in value, that is, bullish; then we ‘buy’ the product, known as ‘going long’, and we will aim to sell it at a higher price to make profits. Otherwise, if we think that a financial market will fall in value, that is, bearish; then we ‘sell’ it first, known as ‘going short’, and aim to buy it back at a cheaper or lower price for profits.

Going Bull-‘Buying’ in anticipation of a rising price

If we buy a financial market that we believe will rise in value, and in due course the prediction is reflected on favorable price movement, we can sell at a higher price for a profit. Financial Spread Betting is not without its risks though, and if we anticipated the price movement incorrectly and the value falls below the price that we buy, we make a loss.

Going Bear-‘Selling’ in anticipation of a falling price

If we sell a financial market that we anticipated will fall in value, and in due course our prediction is reflected on the downward price movement, we can buy at a lower price for a profit. Likewise, if we anticipated the movement incorrectly and the value or price rises, we make a loss.

Margin Trading

Spread Betting is a leveraged product which means that we are only required to deposit a fraction of the overall value of the trade to start trading on the market. Typically, margins with different brokerage house varies between 1% and 10%. Margin enables us to magnify our return on the investment. However, losses will also be magnified and therefore, margin trading may not necessarily suitable for everyone, especially beginners.

Identifying the ‘spread’ in Spread Betting?

Prices of financial instruments are quoted in pairs known as the bid and the offer. The bid or ‘sell’ price is quoted first and the offer or ‘buy’ price is quoted second. The spread is the difference between bid and the offer. If, say for example, we are viewing the price of Coffee in the commodity market, it would look like this:

CF 1.25 / 1.55

The price to the left is the Sell price and the price to the right is the Buy price

Since Coffee spread is priced at 1.25/1.55; that means we could either:

Buy at 1.55 if we anticipated price of Coffee will rise in value

Sell at 1.25 if you thought price of Coffee will fall in value

As explained above, hope beginners in forex trading could get better understanding on the basic term of spread betting in order to help us familiarize with forex spread betting which will be explained further in the coming article.

Forex Spread Betting-Part 1