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: How does foreign exchange work?11 Views
Finance allah shmoop how does foreign exchange work All right
Well there's risk when you buy and sell goods and
services outside of the u s that isn't there when
you buy and sell goods inside the u s your
smoothies and absence a major chain of a thousand smoothie
shops you buy a million bananas a year the customers
believe that they have a peel you buy all of
them plantains actually these little guys from uganda and just
agreed to pay in ugandan shillings One u s dollar
buys about four thousand ugandan shillings and that's a lot
of bananas You take the risk on the foreign exchange
currency because well you don't like hedging your bets you're
just going to take the risk if the currency moves
up or down it's on you horse at another way
Yeah if you were nervous about relative currency valuation fluctuations
well you could be a kind of currency life insurance
in paying a ten or twenty percent premium above where
the relative currencies air trading today that for thousands of
one thing and you could sleep pretty well at night
knowing that your rates were fixed like you're basically paying
Someone else to take the risk of uganda suddenly getting
its financial act together in its currency skyrocketing so that
a u s dollars only buys you three thousand or
two thousand ugandan shillings or things go the other way
But you don't like buying insurance You know how nice
the jets are that insurance executives fly and you know
about warren buffett He didn't get there for free so
you didn't had you didn't do anything to worry about
currency but then all of a sudden china decides to
adopt uganda as its new financial partner agreeing toe underwrite
all of uganda's debts basically in return for well uganda
Yeah they liked owning uganda way better weather and they
also got the highly prized you r l uganda dot
com So then almost literally overnight the ugandan shilling becomes
highly more valued under the deeply respected and feared auspices
of the chinese banking system So instead of a dollar
buying you for thousand schillings while now a u s
dollar only buys you one thousand so your cost of
bananas just went from four hundred bucks a ton to
sixteen hundred bucks and the marginal cost of those banana
Plantain Things in your shakes went from thirty cents over
a dollar twenty and with profit margin per shake it
only two fifty to start with twelve new profit margins
suddenly dropped almost in half Eventually you'll have to find
another banana supplier or raise prices or figure out a
substitute But well for now it looks like this Foreign 00:02:29.253 --> [endTime] exchange deals Profits will get eating
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