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Forex vs Spread Betting

The fact that the basic principles underpinning forex trading and spread betting on currencies are so similar often leads to people assuming that they are pretty much interchangeable. After all, they both depend upon monitoring the foreign currency markets and buying or selling pairs of currencies depending upon which way you think they are going to move. There are, however, several differences between the two which have to be borne in mind by any individual intent on trying to make money by following (or more accurately, predicting) the fluctuations of major currencies such as the dollar, the pound, the euro and the Japanese yen.
The first and most fundamental of these differences is the fact that, in UK law, spread betting on currencies is regarded as a form of gambling rather than simple investment. The main impact of this distinction is the difference in the tax position of both types of speculation. A forex trader has to pay tax on the profits they make over the course of a single tax year. Since spread betting doesn’t involve making any actual purchases Stamp Duty and Capital gains Tax don’t apply, meaning that any investor is allowed to keep 100% of the profits they make. It should be noted that this is only the case as long as spread betting is not your primary means of earning a living.
If you use a broker when trading on forex then they’ll take a commission on every transaction which takes place using an Electronic Communication Network (ECN) account. This is not the case with spread betting, or with a type of forex trading known as a ‘spot transaction’.

Market Size
Forex trading is, by its very nature, restricted to the market involving particular pairs of currencies, and one of these currencies will almost always be a historically stable currency such as the dollar. Spread betting, on the other hand, offers much more flexibility, with investors betting on the movements of everything from share prices to the value of a specific housing market. The issue of how widely to spread your investment ultimately comes down to the amount of time you have to spare to devote to following market fluctuations. Currency markets are the largest and most transparent in the world, whilst other markets might require much more effort to follow with the attention to detail needed for successful investment.

The Legal Aspect
The legal position of spread betting, as opposed to forex trading, depends upon where you’re reading this. If you’re in the UK or Ireland, for example, then spread betting is perfectly legitimate. If you’re in the United States, on the other hand, you’d be breaking the law if you try spread betting, as would be the case in Japan, who have legalised casino play but still frown upon the spread. In general terms, if a country prohibits online gambling then spread betting is out of the question and even a country such as Australia, which recently made spread betting legal, doesn’t allow for UK style tax exemption.

When it comes to accessing the online platforms needed to engage in either forex trading or spread betting, the situation is pretty much the same. Indeed, many brokers will offer both facilities on the same website, with similar interfaces which are designed to be simple for beginners to use but flexible enough to accommodate more experienced investors.

Which to choose
There’s no doubt that the reputation of spread betting still lags behind that of forex trading. Whilst the latter is regarded as respectable investment, the legal status of spread betting as gambling means that some serious investors turn a blind eye to it.

Against this can be weighed the fact that the spreads offered by brokers dealing in both forex trading and spread betting are often very similar. In cases such as this, the advantageous tax position of spread betting is the factor which often persuades investors to move in that direction. It should be noted, however, that not all brokers offer spread betting to their clients, so if you’re otherwise happy with the service your broker is providing, you’ll have to ask yourself if the plus points of spread betting are worth the risk of moving elsewhere. Ultimately, much like the speculation itself, choosing which type of market to work in will depend upon weighing up the various factors and trusting your gut instinct.

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