See: Foreign Exchange.
If a horse named "Forex Spread" ever runs in the Kentucky Derby, this would be an easy one to define. For now, it relates to currency trading...and gets a little complex.
First, the "spread" in "forex spread betting." The term refers to the price difference between the bid and ask for an asset. A financial market works like an auction. Most of the action is run by computers on the backend, so casual investors might not notice the auction part. But for every stock price quoted on Google, there's a bid/ask system going on in the background.
Spread betting uses the gap between the bid and ask at any given time.
The "forex" part of "forex spread betting" refers to currency trading ("forex" standing for "foreign exchange"). The strategy uses the bid/ask spread in the price for a currency pair (Euro/U.S. Dollar, U.S. Dollar/Canadian Dollar, Euro/Pound, etc.).
Spread betting exists in a grey area between gambling and investing. The trader doesn't take a position in an asset (in this case a currency pair). They are simply betting whether the price will go higher or lower.
It's a lot closer to choosing red or black on a roulette wheel than it is to actual investing, as exemplified by, say, buying shares in Apple because you think its earnings prospects look good over the next 10 years.
A better parallel to spread betting might be a sports book, but one where you can make micro in-game wagers. Like betting whether the next pitch in a baseball game will be a ball or a strike, or betting on whether the next play in football will be a run or a pass.
The forex spread betting only takes into account the very near-term, and it only involves choosing a direction and an amount. Moreover, spread betting involves leverage, meaning a trader doesn't have to commit the full capital needed for the transaction. The broker loans the bulk of the amount.
Instead, the trader puts up what's called a stake. That stake is like the bet in blackjack or in the strike/ball bet in baseball. However, the outcome in spread betting isn't just a simple win/lose proposition. The gains or losses in spread betting are decided by the number of points the market moves while the bet is in place.
In forex trading, the smallest movement in the price of a currency pair is called a pip. The number of pips moved in either direction determines the loss or gain on the bet. Multiply the number of pips by the stake and you get the gain or loss for that spread bet.
So...you're spread betting in the euro/yen currency pair. You bet the pair will go up in price. Your stake for the bet is $1,000. The price goes up three pips before you close the position. You made $3,000.
You make another spread bet. Again, you're betting the price will go up. However, this time, it falls five pips before you give up and close the position. You lost $5,000.
Lather. Spread bet. Repeat. And pray.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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