Spread betting forex
Family VII · Market & styles
Not to be confused with spread, forex spread, spread in trading forex.
Spread betting forex is a derivative arrangement in which a trader stakes a fixed amount of money per point of movement in a currency pair's price. No underlying currency is bought or sold; the position is settled in cash when it is closed, and the profit or loss is the number of points moved multiplied by the stake. Because the stake is a rate per point rather than a quantity of currency, the notional exposure is set by the stake size and the distance to the closing price.
How the stake sets exposure
The trader chooses a stake per point, for example £5 per point, and a direction. One point is normally the last decimal place of the quoted price, so a move from 1.2500 to 1.2501 is one point. The cash result is the point movement multiplied by the stake, and it can be positive or negative.
Because no currency changes hands, the position is a contract for difference in economic effect, but the pricing convention is expressed as a stake per point rather than a number of units. The notional value of the position is the stake multiplied by the point value of the pair, which varies with the quote currency and the pair's pip convention.
Worked example
Financing charges, if the position is held overnight, and any spread cost at entry and exit are applied separately and reduce the net result.
Costs and treatment
The dealing spread is the difference between the bid and the ask at which the position is opened and closed, and it is a cost embedded in the entry and exit prices. Positions held past the daily cut-off may attract an overnight financing adjustment. Tax treatment of spread bets varies by jurisdiction: in some countries profits are treated differently from those on direct currency trading, while in others they are not. Margin requirements, stake limits and available pairs are set by the provider and the applicable regulator, so they differ between firms and countries.
Often confused with
- spread
- The spread is the gap between bid and ask prices, a cost component, whereas spread betting forex is a staking method for taking a position; the visible sign is that the spread is quoted as a price difference, not as a stake per point.
- forex spread
- A forex spread is the quoted bid-ask difference on a currency pair, while spread betting forex is a way of trading that pair by stake; the visible sign is a two-price quote rather than a per-point stake.
- spread in trading forex
- The spread in trading forex is the transaction cost embedded in the quote, whereas spread betting forex is the derivative contract itself; the visible sign is that one appears as a price gap and the other as a stake size.