What is Forex Spread Betting?

Forex spread betting allows speculation on the movements of the selected currency without actually transacting in the foreign exchange market.

Key Takeaways

  • Forex spread betting allows speculation on the movements of the selected currency without actually transacting in the foreign exchange market.
  • The three components to a forex spread bet are direction of the trade, size of the bet, and the spread of the instrument to be traded.
  • The advantage of forex spread betting is that it allows traders the ability to utilize the concept of leverage when placing a trade.

Understanding 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, bid and ask—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 the transaction cost, the cost of entering and exiting a trade, is lower.

The lure of forex spread betting, and spread betting in general, lies in its simplicity. There are three main components to every spread bet:

  1. Spread of the instrument
  2. Direction of the trade
  3. Size of the bet

The advantage of forex spread betting is that it allows traders the ability to utilize the concept of leverage when placing a trade. Simply put, leverage lets the investor borrow money, usually from the brokerage firm, to place bets on a currency. The investor need only satisfy the margin requirements, which is the capital required to finance the bet, and not the full amount 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 (€0.5 * 10 pips). 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 loss is credited or debited. 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 (GBP) as capital.