WHAT IS SPREAD BETTING
Spread betting is an account classification that allows traders who are UK residents to trade in the forex market with a tax free infrastructure, meaning capital gains are not taxed by the UK government. From a trading and execution stand-point there's no difference between the forex trading account and spread betting account. The same platform is also used for each.
Spread betting is tax free due to the UK tax code. So if you reside in the UK, then it's in your best interest to trade a spread betting account.
The pip value on the spread betting account is different since the account is denominated in GBP.
The spread betting 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. Like spread betting, traders do not need to actually own any currency.
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” € 1 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 € 1. If the price of the Euro was instead $1.0005, you would end up losing € 1.
Spread betting on shares example
Say Apple is trading with a sell price of 135.05 and a buy price of 135.20. You anticipate that Apple shares are going to rise in the next few days due to a new product release tomorrow. You decide to go long on (buy) Apple shares for £10 per point of movement at 135.20.
After three days, Apple shares have indeed moved in your favour and increased to 135.50/135.65. You decide it’s a good time to close your trade. This means you’ll be coming out with a profit of (13550 – 13520) x 10 = £300, excluding any daily funding charges.
On the other hand, if you originally decided to sell Apple for £10 per point at 135.05 and then closed at 135.65, you would have ended up with a loss of (13565 – 13505) x £10 = £600. Once again, excluding any daily funding charges.