Forex Spread Betting FAQs

Here are some of the frequently asked questions about the forex market. For more information please take a look at our bet details.

What is forex?

Forex is the world's most traded market, open 24 hours a day.

'Forex' stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another.

Currencies trade in pairs, like the euro versus the US dollar (EUR/USD) or sterling versus the US dollar (GBP/USD).

Forex trading is used to speculate on the relative strength of one currency against another.

The foreign exchange market is an over-the-counter market, which means that it is a decentralised market with no central exchange.

Who trades currencies, and why?

Daily turnover in the world's currencies is overwhelmingly driven by speculation for profit.

Most traders focus on the biggest, most liquid currency pairs, known as 'the majors'. These include combinations of the most liquid currencies including the US dollar, sterling, Japanese yen, euro, Swiss franc, Canadian dollar and Australian dollar. More than 85% of daily forex trading occurs in the major currency pairs.

We offer coverage of all the major pairs as well as a host of exotic pairs on currencies that are less heavily traded.

A central reason for the popularity of forex dealing is the enormous liquidity of currency markets, which means that bid-offer spreads are relatively small compared to other asset classes. In addition, spreads are always tightest on the major pairs, where there is the most liquidity.

For example 'buying' EUR/USD:

On the morning of 26 September 2012, EUR/USD stands at 12881-12881.8. The dealing spread between the bid and offer price is just 0.8 points (or pips).

A 0.8-pip spread for EUR/USD represents a spread of less than 0.01% of the underlying contract value, which is very low.

How does spread betting on currencies work?

Spread betting on currencies is very similar to trading currencies with a bank or forex broker, except that it has the significant advantage of being tax free. The conventions used are mostly the same, with the main difference being that we structure your deal as a bet. Take a look at our examples for a more detailed explanation of how this works.

It is worth noting that you can access the forex market using very low bet sizes. For example you can start spread betting the major currency pairs, such as GBP/USD, EUR/USD and USD/JPY, from as little as £1 per point. So for every 1-point (or pip) movement in the forex rate, you could make or lose £1. To put that into context, a 100-point move on any of the major pairs, which would be considered a reasonably large move, would result in a gain (or loss) of £100.

Why do dealing spreads vary?

Our forex dealing spreads are extremely competitive and reflect changes in the underlying markets as liquidity ebbs and flows during the trading day. When spreads in the underlying market are narrow, we pass this on to you with our tightest possible spreads. If spreads in the underlying market become unusually wide (more than 1.5 times our typical spread), our spreads will match this move, but only up to a maximum spread – our cap. In this way we protect you against the widest market spreads.

For example on EUR/USD our spread will typically be 1 pip, but when the underlying market spread is very narrow our spread will be 0.8 pips, and occasionally (late at night, for example) our spread can be 2 pips.

How are margins for forex bets calculated?

Every bet involves a corresponding margin. You can find the margin requirement for each bet on the forex bet details page.

Bets denominated in currencies other than sterling normally have a margin requirement denominated in the relevant currency. In such cases you can, if you prefer, put up sterling; conversions will be made at an exchange rate no more than 0.3% less favourable to you than the current rate.

Placing a stop order on a particular bet can result in a substantial reduction in the margin requirement. The margin required for a controlled risk bet will normally be equal to the maximum amount you can lose on the bet.

When you have a non-guaranteed stop order to close a bet, the margin requirement is equal to:

(bet size x stop distance) + (no-stop margin x slippage factor)

The slippage factor is 20% of the normal margin requirement for indices, forex and all other non-shares markets. See the example below, or visit our risk management page for details.

Why deal forex with us?

The three main advantages are:

• Tight spreads thanks to our variable dealing spreads proposition.
• A comprehensive real-time charting package, which many of our forex traders rely upon to help their decision making.
• Our comprehensive range of order types, such as trailing stops.

How can I learn more about forex?

We have a free online seminar dedicated to learning more about forex.