Spread betting, forex trading and contracts for difference trading (CFD) are leveraged products. These are alternatives to traditional trades, with tax benefits.
Traders seeking long-term yields are turning to spread betting and forex trading!
Why are Spread Betting and Forex Trading so Popular Today?
Traders are turning to forex trading and spread betting as alternatives to traditional forms of investment. Among others, spread betting offers traders a tax-free opportunity to profit off the financial markets. The beauty of this form of trading is that you can generate profits regardless of whether the markets are rising or falling. Profitable trading opportunities exist in bullish and bearish markets, provided you speculate accurately. As a case in point, you may believe that the upcoming quarterly results of Walmart will adversely affect the share price. If your assumption is correct and you take out a speculative position on Walmart with spread betting, you can generate profits. Likewise if you believe that the upcoming quarterly results are going to yield negative results for the stock price, you could take a position in that direction to profit too. This is your point of departure for all spread betting activity.
What are leveraged products?
Recall that spread betting and forex trading make use of leverage. This means that you can take out a position by making a deposit that is substantially less than the size of the trade you’ll be working with. A caveat is in order: leveraged products such a spread betting and forex can go in either direction – in your favour or out of your favour. You begin by making a deposit which is the equivalent of a percentage of the overall trade size. This figure typically hovers between 1% of the trade value and 10% of the trade value, depending on where you are trading. This initial figure is also known as the margin requirement. If you wanted to take out a position worth $10,000 on a technology stock such as Google, Apple or Facebook, a 5% margin requirement would be the equivalent of $500. Even though you have only deposited $500, you would be trading to the value of $10,000 and be liable for all outstanding payments.
Many traders who are new to spread betting and forex trading need to understand the difference between leveraged products and traditional binary options products without leverage. You can substantially increase your earnings with leveraged products, but you can also magnify your losses if you end out of the money. Unlike binary options trading, leveraged products in spread betting and forex can lead to losses which extend well beyond your initial deposit.
Spread betting in action
As mentioned earlier, you can generate profits in rising and falling markets. If you are of the opinion that prices will rise you would go long with call options, and if you believe that markets will fall you would go short with put options. As a basic example, you may buy at a price of 100 and sell at a price of 106 and for every point that the price rises you would generate a fixed profit per point. To clarify this, consider a particular index such as the UK 100 index which may be priced at 6500/6501. These figures correspond to the selling price and the buying price respectively.
If you think that index will rise within 14 days and you buy at the price of 6501 with a betting stake of £10 per point, any price rise will yield £10 per point. If after two weeks you decide to sell and the price is 6540, you will have generated a 39 point gain which is the equivalent of £390. That figure is tax-free. If by contrast the price had dropped by 39 points, you would have made a loss of £390.
When it comes to trading currencies – forex – it’s much the same because price movements are also evaluated according to individual points known as pips. For every point that a currency moves, there is a certain yield to be gained or a loss to be incurred. And that’s what spread betting in action looks like!
Author 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 from his vast expertise for the globally renowned spread betting company –InterTrader.
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