How does Spread Betting work?
|In ForexSQ we’re going to introduce you to the spread betting functioning. “Spread” is the difference between the bid and ask price of a security or an asset. Bid-ask spread, which might be referred as bid-offer spread or buy-sell, shows the difference of those prices when an immediate order (ask) or an immediate sale (bid) is placed on the market. In foreign exchange market (Forex) relative value is given as a single price to eliminate any potential issues that might be caused by buying of a security and not being able to sell it or vice versa.
Most brokerage firms offer what’s called a “dynamic spread” to their clients. Dynamic spread moves depending on the trade volume or the volatility of the market. Whenever there is an important event like last Friday’s NFP, spreads go up as more people try to get in the market to take advantage of big fluctuations. Thus, the spread can be a good indicator of market volatility and volume.
Some traders may prefer fixed spread over dynamic. Usually, it’s easier for new traders to calculate the risk/reward ratio when spreads are fixed. Moreover, hedging positions using correlations of pairs is done more comfortably using fixed spreads. If for instance trader has a EUR/USD sell position as the pair is going up (due to USD losing value) he/she might hedge that position by going into a long position on a pair like AUD/USD or NZD/USD which offers more profit/loss per pip movement when compared to EUR/USD.
On the other hand, dynamic spreads are preferable for experienced traders. Before big potential moves on the market, prices are generally fairly calm and spreads get even close to zero. Taking positions before that event takes place requires analyzing the market thoroughly. However taking the right position and sticking with it brings more profit since spreads are really low before fluctuations.
As prices start to move wildly it’s going to be more expensive to catch that movement for a trader because of the spreads widening.
Spread betting offers flexibility for an investor since you don’t need to own any type of currency or commodity or stock to bet on the price movement. Initial investment can be in different currencies and profits/losses are calculated to according to that currency. Using leverages for spread betting increases market exposure thus creating a high risk/return environment and before starting spread betting an investor should understand the risks involved with it to make more educated decisions.
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