Forex Trading vs Spread Betting: Which Is Best?

Forex spread betting and forex CFD trading both let a UK trader speculate on currency pairs with leverage. The difference is the pricing unit and the tax treatment. A spread bet is priced in £ per point, while a forex CFD is priced in lots. For most UK retail traders, spread betting profits are tax-free, while CFD profits carry Capital Gains Tax.

What Is Forex Trading?

Forex CFD (Contract for Difference) trading is a way to speculate on the price movements of currency pairs without actually owning the underlying asset. CFDs are financial derivatives that allow you to take a position on the price movement of an asset, such as a currency pair, without actually buying or selling the asset itself. The forex market is the largest, with an incredible $7.5 trillion exchanged per day, which engulfs other markets in terms of volume. The forex market is the largest, with an incredible $7.5 trillion exchanged per day, which engulfs other markets in terms of volume.

Here is an example of forex CFD trading in GBP (British Pound):

Let’s say you think the GBP/USD currency pair will rise in value. You can open a long (buy) position on the GBP/USD currency pair using a CFD. If the market moves in your favour and the GBP/USD currency pair rises in value, you can then close your position and realise a profit. On the other hand, if the market moves against you and the GBP/USD currency pair falls in value, you can close your position and realise a loss.

In forex CFD trading, you only need to put up a small percentage of the value of the trade as a margin, which is a type of collateral that is required to open and maintain a position. This means that you can trade larger positions with a smaller amount of capital, but it also means that your potential losses can be greater than your initial investment.

I made a spread betting vs CFD guide if you want to understand more of the differences between these trading strategies.

Written by David Levy

Fact Checked by Justin Grossbard

Fact Checked by Justin Grossbard

What Are Spread Betting Vs Forex Trading Difference?

Forex spread betting and forex CFD trading are two different ways to speculate on the price movements of currency pairs, and they have some key differences.

1. Taxes

One of the stand-out differences between forex CFDs and spread betting is how each product is taxed. If you profit from a forex CFD, then you will be subject to capital gains tax, which can increase your overall trading fees. Meanwhile, with spread betting, you do not pay capital gains tax on your profits, which makes them attractive if you are consistently profitable.

2. Trading Fees

The trading fees with spread betting are very streamlined and have spread-only costs, limiting your choice of how to pay for your services to variable spreads only. On the other hand, forex CFDs typically offer a selection of accounts and ways to pay. You can pay by either variable spreads (like spread betting) or through commission-based accounts with tighter spreads (usually from 0.0 pips on EURUSD).

3. Key Definition: The Spread

The spread is the difference between the bid (to buy) and ask (to sell) price, and brokers charge this as a markup for the service they provide. If you see the buy price of EURUSD at 1.0500 and the sell price at 1.0499, you will be paying a spread of 1 pip (1.0500 less 1.0499 = 1). I.e.) If you place a stake of £10 per point with a one-pip spread, it will cost £10 to enter the bet.

4. Commission

For spread betting, there is no commission on any bets because the spread betting broker earns their revenue through the spreads they offer price. While with CFDs, you can choose to have a commission-based account with tighter spreads (usually from 0.0 pips).

5. Base Currency Options

A key strength for those based in the UK is that spread betting is based on GBP only. All FCA-regulated spread betting brokers only offer the pound as their base currency. You can compare spread betting platforms on cost and markets before you open an account.  This means you will only bet and profit (or lose) in GBP. This can reduce your costs because there are no currency conversion charges when trading forex or international assets like US stocks.

Here’s the best bit: while you are betting on the same underlying market as the CFDs, the amount you earn will vary because of the currency conversion rate. Meanwhile, with spread bets, you will always win (or lose) in GBP, which can increase your profit (or losses) while speculating and benefiting from the same market movements.

For example, you bought $10,000 of EURUSD at 1.0500 with a CFD (which moves at $1 per pip), and you bought £1 per point on EURUSD at 1.0500 with a spread bet.

If the EURUSD moves up ten pips, the CFD would earn $10, while the spread bet would earn £10. At the time of writing, $10 equals ~£8.20, meaning with spread betting, you are earning an extra 20%+, making it a better choice if you want to maximise your profits.

5. Position Sizing Units

Forex CFD accounts size a position in lots, where a standard lot is 100,000 of the base currency and a one-pip move is worth 10 units of the quote currency. A spread bet is sized in pounds per point instead, so the same exposure is written as a stake. The converter below translates one unit into the other at a dated exchange rate.

Similarities of Forex Trading and Spread Betting

With their differences out of the way, forex trading and spread betting have a lot in common:

1. Both Are Leveraged Products

To speculate on forex CFDs and spread betting, you need to use leverage. This mechanism allows you to provide a small deposit (a margin) to control the entire position of an asset. I.e.) You can deposit £100 to take control of a £1,000 posi, and this is shown as a leverage ratio of 1:10. For every £1 you deposit as margin, the broker loans you £10. Although leverage can amplify your profits on smaller market movements, it can also magnify your losses.

2. Both Are Tax Exempt From Stamp Duty

Because forex CFDs and spread betting are derivatives, you never own the underlying market, exempting you from paying stamp duty on your purchases. This is useful as it saves you from extra costs associated with trading.

3. Both Can Profit In Rising And Falling Markets

Each product allows you to bet on an underlying market by going long (buy) or shorting (sell) the market. This is helpful to utilise volatile markets that can trend up and down within short time frames, which is another reason why these products are attractive.

Forex Trading vs Spread Betting: Pros and Cons

Forex Trading Pros

• Lower trading costs with tighter spreads and low commissions.
• You don’t have to pay stamp duty.
• Write off your losses against your profits when doing capital gains tax.

Forex Trading Cons

• You have to pay capital gains tax.
• Currency conversion fees.
• Overnight funding fees can be expensive.

Spread Betting Pros

• Exempt from stamp duty and capital gains tax.
• All bets are made in GBP, so you do not pay currency conversion fees on any international asset.
• Spread-only accounts simplify the trading costs.

Spread Betting Cons

• It is limited to UK and Ireland citizens.
• You cannot bet on all markets.
• Spreads can be more expensive compared to forex trading.

Trading on Margin in Forex Spread Betting

In spread betting, margin trading refers to using borrowed funds from a broker to increase the size of a trade. When you trade on margin, you borrow money from your broker to make a larger trade than you can make with your capital alone.

Margin trading allows you to leverage your capital and potentially make more significant profits, but it also carries a higher level of risk. If the trade does not go in your favour, you may be required to pay back the borrowed funds plus any interest or other fees the broker charges. This can result in significant losses if the trade moves against you.

Margin Trading Example

Let’s say you want to place a long (buy) bet on a stock Vodafone (VOD is the ticker symbol) trading at 77p per share. You want to buy 1,000 shares with only £500 in your betting account.

The broker will require you to deposit 20% of the total notional value size (1,000 shares x 77p = £770 total notional size) as your margin, while the broker will loan you the remaining 80% (£615) to open the bet. So you will deposit ~£155 as margin and control £770 worth of VOD shares.

The stock price rises to 85p, so you close the bet at a profit. As you exit the bet, you pay back the loan of £615, leaving you with £235 in your account, and when you remove the margin you deposited, it leaves you with £80 profit (£235-£155).

Another way to work out your profit is (85p less 77p) x 1000 shares = 8p x 1000 = £80.

It is essential to consider the risks and benefits of trading leveraged products before using margin to amplify your positions. It is also vital to choose a reputable and trustworthy broker and to carefully read and understand the terms and conditions of any margin agreement.

Spread Betting Calculator

Our Spread Betting UK Calculator is an essential resource for UK traders. It prices a bet from each broker’s own published average spread, read monthly and dated on the page, across nine forex pairs and three indices, and it takes your own levels and spreads for anything else.

Moreover, the tool is designed to provide accurate calculations for margin requirements, as well as potential profits and losses. It is updated continuously to reflect current market conditions. Future enhancements are planned to expand its capabilities, including new financial markets and instruments.

How Do I Start Betting on Forex?

Beginner spread bettors may open a demo account before fully committing to a spread betting broker to learn more about trading platforms and risk management tools. Demo accounts are also an excellent way to experiment with forex trading and financial spread betting or to test betting strategies.

For more knowledgeable or experienced traders, the process of opening a spread betting account or forex trading account will follow these steps:

1. Choose a spread betting firm or forex broker

There are many spread betting providers and UK based forex brokers offering retail investor accounts, so it is essential to research and select a reputable and trustworthy firm that meets your needs.

Consider factors such as the firm’s reputation, available trading platforms, the types of instruments offered, the available spreads, and any fees or commissions charged.

2. Complete an application

Most spread betting firms will require you to complete an online application form to open a spread betting account. This may include providing personal and financial information, such as your name, address, and employment status. You may also be required to provide identification documents, such as a copy of your passport or driver’s license.

3. Select a trading platform

You should choose a broker that provides a trading platform that meets your needs; fortunately, most brokers offer a solid selection of trading platforms. The most popular trading platform is MetaTrader, which is owned by MetaQuotes, and there is a range of MT4 spread betting brokers available to use in the UK.

Other popular trading platforms include MetaTrader 5, TradingView (my personal preference), and cTrader.

4. Open and fund your spread betting account

Once the broker approves your application, you must make a minimum deposit to start spread betting. This can typically be done by making a bank transfer or using a credit or debit card.

5. Start spread betting trading

Once your account is funded, you can start spread betting by placing a bet on the instrument of your choice. Be sure to carefully consider the risks and have a solid understanding of financial markets before placing any bets.

At Spread-Bet.co.uk, we recommend the Pepperstone spread betting account based on its fees, trading platform, and customer service levels. If you’re looking for more information on getting started, then view our page on how to start spread betting.

Forex Spread Betting

A forex spread bet is a bet on one currency against another, and the bet you place is one of three products. Which one you choose decides when it settles and what it costs to hold.

The spot price is the current market price, and a spot bet puts you in the market immediately. It is the common choice. A forward is priced at an agreed rate for an agreed date in the future, and spread betting firms reduce or remove the nightly rollover charge on forwards, which is what makes them worth using on a bet you plan to hold past the end of the trading day. An option gives you the right, but not the obligation, to buy or sell the pair at a set price on or before a set date. What you can lose on an option is capped at the premium you paid, and the trade-off for that is a product that takes longer to learn.

Forwards are built for businesses hedging currency risk rather than for short-term speculation, so most retail forex spread bets are spot bets. The product range differs between firms, so check the market list before you open an account rather than after.

Every broker we compare offers forex markets, which makes the platform a matter of preference rather than availability. MetaTrader 4 is the choice if you want custom indicators or automated trading through Expert Advisors; MetaTrader 5 adds timeframes and order types; TradingView carries the strongest charting.

Leverage is the part of a forex spread bet to size for. FCA retail limits cap a major pair at 1:30, so a £1-per-point bet on EUR/USD controls a £10,000 position on roughly £333 of margin. A 1% move in your favour is £100, around 30% of that margin. The same move against you costs the same 30%, which is the arithmetic behind the loss figures every broker on this site has to publish. Read how leverage works before you place a first bet.

FAQS

Is Spread Betting Legal in the United Kingdom?

Financial spread betting is legal in the UK and regulated by the FCA. Sports spread betting is also legal in the UK and regulated by the UK Gambling Commission, which is the national regulatory authority for gambling in the UK.

The UK Gambling Commission is responsible for regulating all forms of gambling in the UK, including online and offline gambling, to ensure that they are conducted fairly and responsibly.

David Levy