When you trade forex with a spread betting or CFD provider you are not actually exchanging any currency. Rather you are taking a position against your provider on the performance of a particular forex pair: if you are right you make a profit, if you are wrong your provider makes a profit.
At InterTrader we offer spread betting and CFDs on forex with 100% market-neutral execution. This means that, when you place a trade with us, we offset our full exposure on your position by trading in the underlying market, so we have no financial interest in your profit or loss. Find out more about market-neutral execution.
While trading on margin maximises the potential return on your investment capital, it similarly maximises your risk. The forex market can be volatile and the value of your positions can thus change rapidly, and your loss can be greater than your initial margin deposit.
The margin on any spread betting or CFD trading position is the deposit you put down in order to open the position. It represents a fraction of the full contract value of the position, intended to cover potential losses. You should note, however, that you may lose more than your initial deposit, for example if the market ‘gaps’ though your stop level.
Just apply online for a spread betting and/or CFD trading account, then fund your account and you are ready to trade. Because with spread betting and CFDs you are trading on margin, you don’t need to fund your account with the full contract value of your positions. For example you could open a £1 per pip position on EUR/USD with as little as £40 on your account.
The spread is the difference between the price at which you can buy a currency (the offer price) and the price at which you can sell it (the bid price). In a very liquid market, where great quantities of currency are being traded, this difference will generally be smaller than in less liquid markets, where smaller quantities are being traded.
In any forex pair, you are trading the strength of the first currency against the second currency. So for EUR/USD you are trading the strength of the euro against the US dollar. If you buy, you want the price of the euro against the dollar to rise. If you sell, you want the price of the euro against the dollar to fall.
With spread betting you place a stake (in your account currency) per pip movement in the price of the forex pair. In the above example, you might buy £10 per pip, and so make £10 for every pip the price of the euro against the dollar rises (and lose £10 for every pip the price of the euro falls).
With CFD trading you open a contract which represents a trade in the currency. So you might buy 1 CFD of EUR/USD, which (with InterTrader) represents a trade of €10,000 into US dollars. Your profit or loss is calculated in the second currency, in this case US dollars, and is then (if necessary) converted into your account currency.
CFD trading more closely reflects physical forex trading in that you trade in the first currency and your profit or loss is realised in the second currency when you close your position.
The foreign exchange market is grouped into pairs of currencies, showing the exchange rate for trading one currency for another. Some popular forex pairs include GBP/USD, EUR/USD and USD/JPY.
Though spread betting can offer investors with diverse trading styles the opportunity to benefit from their market research and chart analysis, you must remember that spread betting also involves risks. When trading on margin, losses can be enhanced just as much as gains. If, however, you implement proper money management techniques and limit margin to reasonable levels, most of these risks can be contained and longer-term gains can be generated using stable and consistent investment strategies.
Margin trading involves the use of leveraged position sizes where relatively small amounts of money can be used to fund much larger positions. For example, a trade using 10:1 leverage would enable a trader with £10 to open a position size valued at £100. In this case, the extra £90 is borrowed from the spread betting provider to enable the trader to maximise potential gains (or losses, if the position does not work as anticipated).
Providers typically make margin requirements forcing traders to have a certain amount of money available in the trading account (generally anywhere from 0.5% to 10% of the total trade size) to keep the margin trade open and active. You should remember that, while margin trading can allow traders to maximise gains through larger position sizes, losses can be equally enhanced and you will be responsible for these losses if the trade moves adversely.
The most obvious difference between a spread bet and a CFD (Contract For Difference) is the way each is viewed in terms of tax liability. When trading CFDs, traders are held accountable for taxes after capital gains are realised. This liability might lead many to believe that spread betting is always the preferable method but this is not always the case. One benefit of CFD trading is that losses can actually be written-off on your tax liabilities. This is not the case for spread bets because these trades have no tax liability. Some traders therefore prefer CFDs because they offer a higher level of liability protection.