Are these Trading Methods Six of One and Half a Dozen of Another?
Once you are ready to dabble in currency trading, you may be tempted to believe that there is little daylight between
spread betting and Forex trading. By the looks of it, Forex trading is merely the exchange of one currency for another. A seller sells and a buyer buys. In a typical currency pair like the USD/JPY, the USD is represented relative to its equivalent value in JPY. If the figure is 118.8600 it means that USD1 is the equivalent of 118.8600 ¥. If the dollar appreciates, it means that more JPY will be needed to buy USD1, and if the USD depreciates, less JPY will be needed to buy USD1. When we speak of currency pairs, it is the primary currency in the USD/JPY pair that is quoted. So if the pair appreciates, we are actually seeing the USD appreciate relative to the JPY.
Understanding Spreads and How to Use Them
With currency pairs (Forex) you can go Long (Call Option) or Short (Put Option). Stop losses protect traders from losing too much money by automatically selling when a certain point is reached. The spreads you get at spread betting companies bear a striking resemblance to forex brokerages. The costs are evenly matched, but the big difference comes in the form of taxation. When you engage in spread betting, there are no lots to trade as the only factor that matters is the size of the bet you are prepared to make. For the purposes of illustration in today’s market, the EUR/USD pair could have a spread of 1.1150 – 1.1153. As a trader, you could go short on the pair and sell at 1.1150 for €1 per pip. Since you are dealing with such small margins, you have the potential to make tremendous profits or losses. While the choice of Forex trading or spread betting is customized to the individual, there are unique attributes to each type of trade.
Spread Betting in Action
As can be seen in the aforementioned example, the spread is 3 pips (1.150 – 1.1153). And this is typically the case with a forex broker too. The difference however comes in the form of taxation that must be paid. In the United Kingdom, spreadbetting profits are tax free. The Inland Revenue Service claims a substantial component of your profits in Forex trading. But with spread betting this is not the case. It is always best to go with a broker offering the smallest spreads. Remember that the benefits of tax-free ‘spread betting’ are a major incentive over traditional ‘investing’ done at Forex brokers. Capital gains taxes on profits generated through forex dealing eats into your take-home pay. And to offset the payments due to the Dept. of Inland Revenue, you may well have to employ the services of an accountant to find ways and means of reducing your overall tax burden. Swing traders tend to prefer spread betting over forex trading. Owing to the fact that the brokerage controls the spread, intraday trading is not advised. The choice or which type of trade to make is entirely at the discretion of the individual trader.
Author’s Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes his vast expertise to spread betting broker comparison website, spreadbettingreview.co.uk.
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