Is Forex CFD Trading Spread Betting?

Aug 16 • Forex Trading Strategies • 2792 Views • Comments Off on Is Forex CFD Trading Spread Betting?

Spread betting is a form of gambling where you wager on any of the possible outcomes of an event. It took quite a long while for the financial markets to finally openly accept the fact that trading the financial markets is indeed a form of gambling. But the introduction and adoption of CFDs by practically all the financial markets as a tradable derivative product confirmed this fact.

CFD stands for ‘Contract for Difference’ or simply a contract entered into by a trader and the CFD provider which says that the seller will pay the buyer an amount equivalent to the difference between the current value of a financial asset and its value at the time the contract was made and if the difference in the values happens to be negative then the buyer will be the one to pay the seller.

Under this set up, the CFD provider matches the trade made by trader meaning if the trader buys, the CFD provider sells and if the trader sells then the provider acts as the buyer and matches the trade. The trader essentially puts a wager on the direction the underlying asset is headed by initiating a buy or sell order. Take note that the trader is not buying or selling the actual asset but merely betting on where the price of the asset is headed. He puts in a buy if he thinks the price is headed upwards and sells if the price is headed south. Either way the trader places his bet, the CFD provider matches his trade with an opposite trade (selling when the trader buys and buying when the trader sells).

In the past, this is known as bucketing which is a prohibited practice of scrupulous brokers who pocket trades instead of executing them on the trading floors. But since globalization and internet technology has rendered trading floors playing second fiddle to online trading, regulatory measures seemed to have relaxed giving way to derivative product trading in the various financial markets.

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Trading in Forex CFDs is no different from wagering on who gets the most medals in the Olympics or who will win the most medals or betting on who will win in a Pacquiao vs. Mayweather boxing match. The only difference is with Forex CFD you are betting not on a specific outcome like who will win or lose but on the range and direction of the price movements of the underlying asset.

No amount of rigid technical and fundamental analysis to stack the odds on the trader’s favor will change the fact that Forex CFD trading, like any other derivative trading activity for that matter where the trader does not have an innate interest much less acquire a stake on the underlying asset, will change the fact that trading Forex CFD as well as other derivative product is plain and simple spread betting.

This should not however be taken negatively. In fact it is more of a positive development. In the first place a lot of retail forex investors have for decades now been trading the currency markets using their gambling instincts. The best part is Forex CFD offers individual investors who have a big appetite for risks to take advantage of the price volatility of the foreign currency market.

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