The forex market has developed throughout time, making it more manageable for newcomers and others who might not necessarily work in the financial sector. Trading is a feasible career choice due to the growth of trading platforms and financial products.
But starting in any field may be challenging, and forex trading has unique characteristics that make it difficult to get started. Therefore, it’s a good idea to understand what you’re trading and your methods fully.
This is becoming increasingly difficult due to the range of instruments and types of trading that brokers are now offering. If you’re a beginner, it’s not hard to get confused!
Forex trading and spread betting are two distinct features in the forex world, but they get mixed up quite often. Read on to find out more about the two and how they differ.
What is traditional forex trading?
The basis of traditional forex trading is buying a currency in order for its value to rise in relation to another currency.
For example, the exchange rate between the pound and dollar could be £1=$1.50. If the trader believes the price will rise, they could buy £100 at the price of $150. The exchange rate then rises to £1=$1.60. The trader then sells their £100 for $160 and makes a $10 profit on the trade.
When you open a position using a broker, this process is what you’re doing to make profits most of the time.
Therefore, with traditional forex trading, you’re making money directly from currency exchange. Forex itself means ‘foreign exchange,’ which gives you a clue to how forex trading works!
What is Spread Betting?
Spread betting differs from traditional forex because you don’t actually buy or exchange currency. Instead, you skip this part and profit directly from betting on whether the price will rise or fall.
As a trader, you can either place a ‘long’ position (you think the price will rise) or a ‘short’ (you think the price is going to fall).
Instead of profiting from the value of your purchased currency like in traditional forex trading, you make a bet per point movement in the price.
For example, you may open a position that is £10 for every 0.01-point rise in price. If the pound price rises from $1.50 to $1.60, there is a 0.10 point rise in price. Therefore your profit will be 10 × £10 = £100.
Therefore, the amount of profit you make will depend on how much you bet per movement and the size.
Different trading platforms will offer different types of trading options. If you’re more interested in spread betting and looking to focus your trading career on it, make sure your broker offers spread betting positions!
In the long term, it’s a good idea to pick a broker focused on spread betting as you may receive more tailored software and advice.