This spread is what brokers will earn in lieu of a commission.
For the investor, the narrower the spread the lower will be the trading cost.
The investor will then decide if the price of the currency pair will end up higher than the ASK price
or lower than BID price.
One of the major advantages of spread betting from a trader’s point of view is the ability to leverage their trades with spread betting.
With leverage trading, the investor does not have to come up with the full amount of the trade.
Instead, he is only required to meet the margin requirement which is just a small percentage of the trade value.
For example if the spread betting provider stipulates a margin requirement of 10%, this means that for a trade value of $10,000, the investor is only required to deposit a sum of $1,000 into his trading account in order to execute the spread bet.
Let’s assume that you are interested in trading the EUR/USD currency pair.
The quotes offered by the spread betting provider for the currency pair is 1.0020 for the ASK price and 1.0015 for the BID price. This means that the spread which the spread betting provider is earning is 5 pips. If you believe that the euro will strengthen against the US dollar, you will be betting that the price will end up higher than the ASK price of 1.0020. Conversely, if you are bearish about the EUR/USD currency pair, you will be betting that the price will end up lower than the BID price of 1.0015.
Unlike traditional Forex trading, spread betting does not involve trading in “lots”. Instead, the investor has to decide how much he wants to trade with. With reference to our example above, you are bearish about the market and you decide to take a short market position. You then sell the EUR/USD at 1.0015 at $10 per pip. So if the EUR/USD falls below 1.0015 by 10 pips to 1.0005, then you will have gained a profit of 10 pips x $10 = $100.
For our ending note, we would like to caution our traders that spread betting is not for everyone
as like all types of trading it is a high risk endeavour.
You should only spread bet with money that you can afford to lose.