DEFINITION of Forex Spread Betting
Forex spread betting is a category of spread betting that involves taking a bet on the price movement of currency pairs. A company offering currency spread betting usually quotes two prices, the bid and the ask price - this is called the spread. Traders bet whether the price of the currency pair will be lower than the bid price or higher than the ask price.
The narrower the spread, the more attractive the currency pair is because entering and exiting a trade costs less in spread.
BREAKING DOWN Forex Spread Betting
The advantage of forex spread betting is that it gives investors and traders the ability to leverage. They [the investor] borrow money from the company to place bets on a currency, needing only thr capital required to finance the bet, not size of the entire bet.
For example, a brokerage firm quotes an ask price for the EUR/USD pair at 1.0015 and a bid price at 1.0010. If you as a trader believe that the Euro will strengthen compared to the USD, you could “bet” € 0.5 for every point (Pip) the Euro increases above 1.0015. If the EUR/USD after a certain period of time came to $1.0025, you would receive € 5. If the price of the Euro was instead $1.0005, you would end up losing € 5.
Like spread betting, traders do not need to actually own any currency when forex spread betting. However, they will require capital in their account in the currency in which the underlying profit or gain is paid or charged in. This currency is generally the currency of where the spread betting service is located. For example, a spread betting site in the U.K. would require British pounds as capital.