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 Forex vs Spread Betting |
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| 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. |
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Gambling
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. |
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Commission
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.
Access
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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