Currency spread betting is a hybrid of investing and gambling. It involves an investor staking an amount of money that one particular currency will move in a certain direction on foreign exchange markets against another currency. The bet does not have fixed odds as such, but rather the investor makes or loses money based by how much the currency moves. Potential investors need to understand how spread betting works, prepare for potential losses, learn about the relevant currencies, and make sure the starting price for the bet is acceptable.
American investors should note that under US law, currency spread betting is considered an illegal form of gambling. This means that even if investors do find a service offering this activity, they should steer clear, as it will be unregulated and there will be little or no comeback if things go wrong. In most cases of online spread betting, somebody in a country where the activity is illegal will not be allowed to take part, even if the website operates in a country where spread betting is legal.
As with all forms of spread betting, it is vital to remember that there is the potential to lose more than the original stake. With currency spread betting, possible losses are as good as unlimited: the only limit would be if one of the currencies became worthless. This entails two important strategy decisions for investors. The first is to work out the maximum amount of money they are prepared to lose, in the same way as if they were buying stocks.
Once investors have done this, they must decide how they will make sure to stop when they reach this loss. If they have a great deal of self-control, they can simply make certain they close their position if the potential losses reach this position. Unless they are certain they will do this, however, it may be better to put a stop position in place with the exchange. This will automatically close the at a designated point. This can help overcome the natural tendency to hold on just a little longer in the hope that things will improve. It's important to remember that the more an investor is prepared to let his position worsen, the more cash he will need available to pay margin calls, where the exchange asks for a portion of his potential losses to keep the position open.
One of the keys to currency spread betting is, logically enough, understanding the currency markets. Investors should learn as much as possible about both the general economics of how currency prices move, and the specific current situation of the two currencies they are considering betting on. It may be safer to stick to leading currencies at first, even if the starting prices are not as favorable, to make sure the most reliable data is available.
The other key to currency spread betting is to get a good starting price. A quick rule of thumb is that a narrower spread will mean the deal is better value. The more relevant figure, however, is the difference between the current market price and the starting point for the bet, whether that be for one currency to rise or fall. The bigger the difference between the two, the more movement is needed in the right direction before the bet can begin to pay off.