Spread Betting and Forex: Making Use of Leverage
01/19/2016 9:00 am EST
Since traders are turning to forex trading and spread betting as alternatives to traditional forms of investment, Yohay Elam, of ForexCrunch.com, defines each term and outlines how they make use of leverage.
Spread betting, forex trading, and contracts for difference trading (CFD) are leveraged products. These are alternatives to traditional trades, with tax benefits.
Traders seeking long-term yields are turning to spread betting and forex trading.
Why Are Spread Betting and Forex Trading so Popular Today?
Traders are turning to forex trading and spread betting as alternatives to traditional forms of investment. Among others, spread betting offers traders a tax-free opportunity to profit off the financial markets. The beauty of this form of trading is that you can generate profits regardless of whether the markets are rising or falling. Profitable trading opportunities exist in bullish and bearish markets, provided you speculate accurately. As a case in point, you may believe that the upcoming quarterly results of Walmart (WMT) will adversely affect the share price. If your assumption is correct and you take out a speculative position on Walmart with spread betting, you can generate profits. Likewise, if you believe that the upcoming quarterly results are going to yield negative results for the stock price, you could take a position in that direction to profit too. This is your point of departure for all spread betting activity.
What Are Leveraged Products?
Recall that spread betting and forex trading make use of leverage. This means that you can take out a position by making a deposit that is substantially less than the size of the trade you’ll be working with. A caveat is in order: leveraged products such a spread betting and forex can go in either direction, in your favor or out of your favor. You begin by making a deposit which is the equivalent of a percentage of the overall trade size. This figure typically hovers between 1% of the trade value and 10% of the trade value, depending on where you are trading. This initial figure is also known as the margin requirement. If you wanted to take out a position worth $10,000 on a technology stock such as Google (GOOG), Apple (AAPL), or Facebook (FB), a 5% margin requirement would be the equivalent of $500. Even though you have only deposited $500, you would be trading to the value of $10,000 and be liable for all outstanding payments. To read the entire article click here…
By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com