How fx works and how spread-betting works could be puzzling to some, so in this article we are going to take a look at what spread betting is and how it works. Spread betting is an agreement between two parties to exchange the difference in value of two currencies, at the time of the contract. The contract will stipulate which two currencies are being traded, as well as the exchange rate at which they will be exchanged.
Spread-betting is a form of derivatives trading where you take a position on the price movement of an asset without buying or selling the underlying asset. With spread betting, you speculate on whether the price of an asset will go up or down, and your profits or losses are determined by the size of your bet multiplied by the difference between the opening and closing prices.
How Spread Betting Works
When you spread bet, you are essentially taking a position on the price movement of an asset. For example, if you think that the price of EUR/USD will go up, you would buy (go long) EUR/USD. If the price goes up, your profits will be greater than your initial investment; if the price goes down, your losses will be greater than your initial investment.
The way in which you make money (or lose money) when spread betting is by multiplying the size of your bet by the difference between the opening and closing prices. So, for example, if you buy EUR/USD at 1.2000 and sell it at 1.2010, you would have made 10 pips (0.0010). Your profits (or losses) would be calculated as follows:
(1.2010 – 1.2000) x £10 per pip = £0.20 profit (or loss)
So, if you had bet £100 on this trade, your profits would be £20.
The beauty of spread betting is that your potential profits and losses are unlimited. This means that you can make a small bet and potentially make a large profit, or lose a large sum of money by making a bad trade. It also means that you can theoretically make money whether the market goes up or down!
Advantages of Spread Betting
There are several advantages to spread betting which include:
– You can make money whether the market goes up or down
– The size of your potential profits and losses are unlimited
– Leverage is available, which means that you can make large bets with small amounts of money. For example, if you only had £100 to start with, it might be difficult to purchase EUR/USD outright; however, with spread betting it would be possible to buy 1 lot (€100 000 worth) using leverage. This is because brokers usually offer leverage on their FX products
– There is no dealing desk involved with FX spread betting (unlike CFDs), so there is no markup
So is spread-betting right for you?
– If you have the spare cash to invest and are prepared to take a risk, then spread betting could be right for you.