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What is Forex Trading?

Read more about what Forex trading is, how to trade Forex and discover a range of tips and strategies.

Trading on forex is a means to speculate on the relative values of currencies. Forex trading involves the simultaneous purchase of one currency and selling of another, with the aim of profiting from fluctuations in the exchange rate.

The market is enormous, with average daily turnover of $5.1 trillion, according to the latest assessment of the market. Forex trading is described as being an over-the-counter (OTC) market, which means there are no central exchanges or clearing houses. Because of this forex trading is a truly 24/7 market, with prices moving constantly and gapping is less likely to occur. The forex market is also said to be a principals-only market. To explain, when buying and selling stocks investors will use a broker. Forex trading firms are called dealers and assume risk to make the trade. Rather than charging commission, one of the primary ways brokers make money is on the bid-ask spread.

Forex trading always involves two currencies and is therefore sometimes called a zero sum game. When one currency rises in value by definition the currency on the other side of the cross necessarily loses value.

What is the Forex Market?

What is the Forex Market?

what_is_forex_trading_what_is_forex_market

The primary purpose of the forex market is for large multinational companies to exchange one currency for another – for example to purchase raw materials in another country or to repatriate foreign earnings. But this primary element makes up only around one-fifth of the market. The rest is speculative, with prices driven by the actions of investors betting on future movements.

CFDs vs spread betting

CFDs versus spread betting

For retail clients, forex trading means spread betting or trading CFDs (Contracts for difference).

The chief difference lies in the tax consideration – spread bets are free from capital gains tax in the UK, while CFDs are not*.

With spread betting the contract size is determined by the amount of money you are prepared to stake per point. CFD trading involves buying or selling contracts that represent a certain amount per point in the market.

Spread Betting CFDs
No Capital Gains Tax
but you cannot use losses to offset tax liabilities
Capital Gains Tax to pay
but can use losses to offset tax liabilities
No Stamp Duty No Stamp Duty
No Commission No Commission (forex)
Leveraged product Leveraged product
Trade on rising and falling markets Trade on rising and falling markets
Prices based on underlying market Prices based on underlying market
Expiry dates on all spread bets
 
No expiry dates
except on futures, binaries and options

*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

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