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Forex Spread Betting: Capital Gains, Risks and Fraud

BY  GRACE  D'SOUZA /   NOVEMBER 12, 2022   

Trading within the stock markets has been a huge part of profit making for centuries. Flourishing technological advancements, newer trading techniques and so on have boosted capital investment opportunities. Are these enticing profit making opportunities scam free?

      rading and investing within the monetary markets can without a doubt grant earnings, however it isn't without its share of risks. The conventional technique of trading from the very beginning has been through the purchase of securities in the form of shares and stocks in publicly listed domains. These securities are known for paying dividends, supplying the shareholder with a proportion of the organisation’s income over the course of the year. Shareholders can sell their stocks at any point in time. The desire could be that shareholders can promote their stocks at a better rate than they got them for, creating a long-term gain while still benefitting from normal dividend bills in the meantime. Be that as it may, success is rarely ensured in these kinds of transactions and many elements can exert influence on the market. Meaning that stocks may grow to be worth much less than the shareholder paid for them. The main hassle lies in the sales proportion, as it typically calls for buyers to have a respectable quantity of capital to invest, cash that they may be glad to sink into the marketplace for months or years to come.

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Spread betting allows people to take advantage of the market with much smaller bankrolls and potentially withdraw profits on a daily or weekly basis.

As an alternative, spread betting allows people to take advantage of the market with much smaller bankrolls and potentially withdraw profits on a daily or weekly basis. Spread betting, a derivative strategy, began in the UK in the year 1974 when Stuart Wheeler, a then young unemployed stock broker, had an ingenious idea that got people to start trading on gold prices. At that time, British citizens were not allowed to trade gold for purely speculative purposes, so Wheeler intuited the idea of trading gold prices as an index. Every week, he would create a market stimulation for his friends and invite merchant bankers who would ‘fix’ the price at which gold would be bought and sold by firms dealing in metal.

9GAG - Pinterest .jpg

Illustration by 9GAG via Pinterest

Once the results were announced, that became the basis on which gold would be traded until the next week. With the idea becoming increasingly popular, more spread betting providers have started to appear. The spread betting market has changed for the better as a result of the enormous technological advancements, making spread betting accessible to the average investor. While private traders benefitted from easy access and the opportunity to speculate on rising or falling prices, the internet allowed spread betting providers to expand the reach of their marketing activities. Since new methods were eventually made available, spread betting truly took off, enabling the individual trader to keep up with the markets' rapid shifts as well as take advantage of a price at any given moment by dealing directly online.

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This gave rise to the contemporary spread betting industry, where bets are now placed on almost any financial asset. A person would typically have a range of options to choose from, including the forex, cryptocurrency, shares, stocks, bonds, and commodities markets. It combines the concepts of betting and investing to allow the investor to profit from market changes without owning any of the underlying financial assets.

  Illustration by Andrea De Santis via Pinterest

In the wake of the crypto craze, forex is becoming a popular get-rich-quick bet among investors seeking to make fast money.

One of these types is Forex spread betting, a type of spread betting that involves speculating on the price movement of currency pairs. In the wake of the crypto craze, forex is becoming a popular get-rich-quick bet among investors seeking to make fast money.  Trading spreads in forex involves opening positions based on your prediction that the price of a currency pair will rise or fall, resulting in profits or losses, depending on if the market moves in your favour or against it. So, by opening a position based on whether traders think the currency will appreciate or depreciate, traders can speculate on the price movements of currency pairs. Short or 'sell' positions would be opened if you anticipated the value to be falling and long or 'buy' positions would be opened if you anticipated the value to be rising. 

Forex spread betting is the most common method of forex trading as the foreign exchange market is the biggest market in the world along with being the most liquid. Spread betting on foreign exchange markets is a tax-free way to trade currencies, but it involves no ownership of the underlying asset. The bid and ask prices are often given when trading pairs. In forex, the spread is the difference between the bid and ask price of a currency. In general, investors select money pairs with tighter spreads, as this allows for the entry and exit of trades expeditiously with decreased transaction costs. Tighter spreads provide a higher chance of accurately speculating on the price movement of the given currency pair. Due to the absence of physical purchases, forex spread betting does not require traders to pay stamp duty or capital gains tax. Since spread betting is a derivative product, the trades are undertaken via leverage, so you only need to invest a small deposit called a margin in order to open a larger position in the market. However, as your profit or loss is primarily based on the full length of your position, it may extensively outweigh your margin quantity.


Generally, spread betting firms will predict where a certain share or index will close at a particular time, and you will wager on the accuracy of the estimation. So, if you believe the estimation to be simply too low, you would ‘buy’ on the price, and if you believe the estimation to be too high, you would 'sell’ on the price. The bid price determines whether traders will bid lower or higher based on the expected currency pair price. Because of the lower transaction costs, the currency pair is more attractive when it has a narrower spread. Traders are at an advantage as they can use leverage when placing trades with forex spread betting since leverage allows them to borrow money, usually from their brokerage, to place bets on currencies. The investor need not deposit the entire amount of the bet. Only the margin requirements need to be satisfied.

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  Illustration by The Guardian via Pinterest

However, in a surge to earn quick money in unwitting ways, many are betting on intraday and short-term price moves in the dollar, euro, Japanese yen, and popular foreign currency pairs by using forex trading apps—trades that regulators fear could get them in trouble. There are many illegal apps marketed by brokerages operating in distant jurisdictions in the United Kingdom that provide online services. 

These apps come with trading literature, webinars, and demo discounts along with videos showing how trading tools helped them leave behind the pandemic lockdown blues. Recently, fake forex trading platforms have hacked many personal Instagram accounts, posting photos of the Instagram user claiming they invested in forex trading apps and made tons of money trading forex.

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Between these tempting financial gains came the law, as the Indian law allows only authorised dealers, banks, and companies with forex trading licences to deal in foreign currencies.

But between these tempting financial gains came the law, as the Indian law allows only authorised dealers, banks, and companies with forex trading licences to deal in foreign currencies. The RBI has liberalised its remittance scheme to enable traders to trade currencies in offshore financial markets, but individual traders cannot directly trade in foreign currencies or transfer funds abroad. In contrast, the brokers who offer the apps claim that there are no laws in India restricting Indian traders from trading on their platform while declaring that they already have a handful of Indian traders using their apps. While Indian residents can deposit INR via net banking, UPI, or even credit cards, the RBI specifically prohibits them from remitting funds for foreign exchange trading. Consequently, any Indian resident paying an Indian company to conduct foreign exchange transactions is also prohibited.

Citizens need to be aware that under the Foreign Exchange Management Act (FEMA), forex trading and speculation cannot be done by the general public of India.

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  Illustration by The Project Twins via Pinterest

Practitioners who specialise in tax and forex regulation were recently alerted by the Enforcement Directorate, a law enforcement and economic intelligence agency, about the forex trading apps following the RBI's release warning investors about currency trading sites. Consultants working for such apps have in the past generated fake laws on their websites, convincing people that they do not conduct illegal activities. Citizens need to be aware that under the Foreign Exchange Management Act (FEMA), forex trading and speculation cannot be done by the general public of India. Factors that enticed

investors towards investing in crypto are the same ones luring traders to currency trading apps.

 

The RBI has come across many deceptive advertisements from unlicensed Electronic Trading Platforms (ETPs) offering forex trading services to Indian citizens on social media platforms, search engines, Over The Top (OTT) platforms, gaming applications, and other similar platforms. There have been reports of these ETPs using agents to personally approach naive customers about participating in forex trading or investment schemes and promising them disproportionately high profits.


It has been reported that these unauthorised ETPs/portals have committed fraud and that numerous locals have lost money as a result of such trading or scams. It is made clear that, in accordance with the Foreign Exchange Management Act of 1999, resident persons may only engage in foreign exchange transactions with authorised parties and for permitted purposes (FEMA). 

Keywords 

Spread betting, stock market, forex, Foreign Exchange Management Act (FEMA)

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The views published in this journal are those of the individual author/s and do not necessarily reflect the position or policy of the team behind Beyond Margins, or the Department of Economics of Sophia College for Women (Autonomous), or Sophia College for Women (Autonomous) in general. The list of sources may not be exhaustive. If you’d like to have the complete list, email us at beyondmarginssophia@gmail.com

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