Britain’s banks are netting bumper profits from trading in currencies and commodities, figures showed last week — and individual investors are increasingly looking to get a piece of the action.

Profits at the investment banking arm of Royal Bank of Scotland soared 335% to £4.87 billion in the first half of the year, while HSBC’s investment bank profits rose 125% to $6.3 billion (£3.8 billion) and those at Barclays Capital doubled to £1.05 billion.

Barclays said the figures reflected “excellent results” particularly from its trading of currencies and commodities.

The results continued the trend shown by US rivals, such as JP Morgan and Goldman Sachs, where investment banking revenues have bounced back from a torrid end to 2008. Regulators are so worried about the amount of money being raked in at investment banks that the Financial Services Authority (FSA) is examining whether “high-frequency trading” — where firms use super-computers to make trades in micro-seconds — is distorting markets.

Now, retail investors are getting in on the act. Barclays Stockbrokers said trading on its foreign exchange platform has soared by more than 95% since January, with two-thirds of investors betting on a strengthening pound. Sterling last week jumped to a 10-month high of $1.70 on the back of strong financial results and hopes of economic recovery, although it fell back to end the week at $1.67 after the Bank of England announced a shock £50 billion injection into the financial system.

David Clements, an analyst at broker Caxton FX, said: “Over the medium-term, we expect sterling to gain — hitting $1.74 and €1.20 by the end of August — particularly if banks and blue-chip stocks show renewed strength, like Barclays last week.”

Others are less optimistic, believing that the UK economy is not out of the woods. Hans Redeker at BNP Paribas expects the pound to drop below $1.60 in six months’ time, while David Lamb at No1 Currency thinks it could fall to $1.58 far sooner.

Commodities, too, have enjoyed a recovery this year on the back of strong demand from China. Copper is the analysts’ favoured base metal, despite having already risen by 76% this year. Analysts at Morgan Stanley believe it could hit $8,444 a tonne by 2013, compared with around $6,131 at present. We offer a guide to trading commodities and currencies.

SPOT TRADING

Buying or selling a currency at current prices (rather than betting on a future price, as with spread betting) has become a popular play on the foreign exchange markets.

Peter Rosenstreich at ACM, a forex trading platform, said: “Formerly the preserve of the big institutions, it’s been opened up to private investors with the advent of online trading platforms around the start of the 21st century.”

Currency pairs are the most common type of spot trade. Here, you simply buy one currency with another one — for example, buying the dollar with sterling.

Barclays Stockbrokers, which launched its foreign-exchange platform a year ago, requires you to have a minimum £5,000 in your account but allows you to trade 100 times your investment — or £500,000. However, Paul Inkster at the broker warned that such high leverage was only suitable for experienced investors — and even then should be used rarely. A more common trade might be £100,000.

Say you wanted to sell sterling and buy the dollar when it hit $1.70 last Wednesday, in the belief the pound would weaken. You sold £100,000 for $170,000 and, for argument’s sake, sterling weakened to $1.60. At this point you could exchange your dollars back into pounds, netting £106,250 — a profit of £6,250 having put down a margin of just £1,000.

In the above example, you could also set a stop order at $1.80 to limit losses if you got it wrong. Barclays will close out open positions automatically if your trade moves against you to the extent that you are using up 90% of your “margin” — the cash on your account available to trade.

EXCHANGE-TRADED FUNDS

Available in Britain for more than 16 years, these are listed shares that follow a specific index or security. They are the easiest way to access most commodities — from sugar and cocoa to natural gas. Generally, advisers favour direct investment — funds that buy or trade physical commodities — rather than those backed by derivative contracts with investment banks.

Thousands of investors in exchange-traded commodities not backed by physical assets had their investments frozen in September after insurer AIG ran into trouble.

Ben Yearsley at Hargreaves Lansdown, the adviser, tips ETFS Physical Gold or Silver, which cost 0.39% and 0.49% a year. You cannot buy directly, so there will be stockbroker commission but no stamp duty.

SPREAD BETTING

This allows you to bet on the movement of currencies and commodities, as well as individual shares and equity indexes. Spread betters need as little as £1 and can move in and out of bets quickly, as they don’t have to buy and sell actual stock.

If Brent crude stood at $70 a barrel, Capital Spreads would quote a spread of 69.98 to 70.03. You would win or lose your stake for every 0.01 movement in the market.

If you thought the oil price would fall, you could “sell” at £10 a point at 69.98. If the market moved lower, you could close your trade at 69.90 for a profit of £80 — £10 times eight points.

As spread betting is classified as gambling, profits are free of capital gains and income tax and you avoid 0.5% stamp duty.

The only way I could make money was to start trading it

Hedge fund adviser Cenk Utkan, from Canary Wharf, east London, has made a profit of about 200% from trading currency in the bear market.

The 33-year-old made the most of the plummeting pound in the financial crisis by “shorting” it — placing a bet that makes money when the value falls.

Utkan, who works for Connexion Capital, trades through dbFX, Deutsche Bank’s online forex platform.

“The financial situation was dire: if you went into property, you’d lose money, if you went into equities, you’d lose money,” he said. “I realised the only way to make big gains was to invest in currency — as the big investment banks have shown.”

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