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Why Spread-betting Represents a Safer Option for Forex Traders

Physical Ownership vs. Derivatives

by Farquar McIntosh

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When you invest in physical products like gold and similar commodities, you tend to assume ownership of the underlying asset. This means that you are bound by peaks and troughs in market value, which in turn will determine when to buy and when to sell for a viable profit.

This is why dealing in derivatives like currency is such an appealing option for traders, as this negates the burden of ownership and enables them to access invest vehicles that optimise gains even in a depreciating market.

Why Spread-betting is Such a Viable (and Safe) Vehicle for Currency Traders

Take spread-betting, for example, which has fast emerged as the single most popular method of trading currency in the modern economy. But why is it so popular, and how can it help forex traders to maximise their gains?

Interestingly, spread-betting is a concept that has been borrowed from the sports betting market, and one that has helped to improve the profitability of forex trading for independent traders. It achieves this by asking investors to speculate on the movement of a chosen financial market (in our case forex), without requiring them to actively own the underlying asset class. Instead, traders will predict whether the market's price will rise or fall within a specified period of time, and the degree to which you are right or wrong will determine the outcome and your bottom line profit (or, in some instances, loss).

The lack of ownership is a huge advantage to traders, who can subsequently profit regardless of the prevailing climate by either supporting growth currencies or hedging against those that are depreciation in value. This creates the type of liquidity and flexibility that investors crave, particularly as the derivative nature of currency can also drive gains that are far in excess of your original commitment.

Beyond this, spread-bettors can also increase their gains on the back of smaller margin deposits. As a minimal margin deposit can support your positions through the spread-betting model, you can reduce your outlay and recoup a higher return in the case of successful investments. Make no mistake; the margin deposits and fees associated with more traditional investment vehicles are far higher, and these costs can eat into any future margins that you are able to realise.

Not only this, but the resultant profits that you earn from your endeavours are are also tax free, meaning that you can recoup more of your hard-earned capital. This is not the case with all investment vehicles, and when combined with reduced deposits it creates a more profitable strategy that can deliver far greater returns over time.

As Safe as Houses: Spread-betting as a Forex Traders Most Lethal Weapon

On a final note, it is also important to remember the role that stop-losses play in reinforcing the safe nature of spread-betting. These orders can be established to automatically close positions if the price moves against investors, while individual traders also have the opportunity to determine the total level of loss that they are willing to endure. This means that you need never lose more than you can afford through spread-betting, which is crucial given the volatile and fast-paced nature of the forex market.

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