Spread Betting: More of a Gamble than Buying Shares
With spread betting, you are taking a view on whether you believe market prices will rise or fall and you will hope to profit from these movements. When you invest in shares, you do so because you believe the company will perform well and their share prices will rise as a result. The two principles are exactly the same.
Just because there is the word ‘bet’ in spreadbet, it does not mean that the transactions carried out in these firms should be likened to out and out betting which is the more popular view of what real gambling is. So what makes spread betting any different than shares trading? The answer is LEVERAGE.
I do wonder really just how much of a role Luck plays in all of this. Really, if you are lucky the stocks you pick fly, if you are unlucky they fail. At the end of the day nobody can predict the future, and with all the Technical or Fundamental analysis considered, with all the risk mitigation covered, luck still plays a part. I then wonder if those who do succeed really do realise how much luck played a part, or whether they really do put it all down to their ability.’
If you have leveraged profits, you also have leveraged losses.
Ask yourself why there are so many adverts to encourage spread betting. I hazard a guess that the providers make lots of money. It is more of a gamble than buying shares. One thing is for sure – spread betting can be extremely profitable or a quick and easy way to lose a lot of money. The problem is that like any gambling you get hooked/greedy at the times when it is easy and then deny the problem as it gets harder.
So are Spread Betting and CFDs Gambling?
I don’t believe you can compare using spread betting and CFDs with gambling. Whilst the name spread betting implies gambling I think of it more as a form of investment through leverage. Now, don’t mistake me. I would not recommend compulsive gamblers use spread betting or CFDs; if handled carelessly leveraged trading represents a fairly easy road to ruin.
Legally speaking spread betting is gambling and in fact only a minority come out on top. But for people who are disciplined and cautious, they are a good way of profit enhancement. For example, when gambling you win or lose, but today I’m down in my CFD account but short-term I have no doubt my account will recover. I researched the diversified companies and they have solid fundamentals, low price/earnings ratios…etc so I just need to maintain my margin.
My trading is now pretty short term and only based on technical analysis. Having said that I still think luck plays a part. I need buying to continue when I buy on strength and I need selling to continue when I am selling weakness. I think I’m lucky when it goes right and unlucky when it doesn’t. Having said that I regularly draw down profits from my CFDs and spread betting accounts and use the money to invest long term in my investment Sipp (self-invested personal pension) account. This has enabled me to build up a nice diversified portfolio.
I would say gamblers are either people who bet on horses, dogs, one arm bandits, online casinos or give their savings to a financial adviser who claims to be an expert and for whom they have no control over.
So are most Spread Bettors Gamblers?
‘Essentially, spreadbetting and CFDs are betting and not investing. Think of it like this (or just look at the name in spreadbetting. There is a big hint there), investing occurs when you invest money in a business or asset class. Its real. It can be touched, its a part of something real. You buy a share in a business, you invest in that business. You put money on the chance that a stock price will go up or go down, but you don’t actually invest in that company – this is betting. You may as well go to Paddy Power and ask him for odds.’ – Tom
Yes, I get the real share thing versus the CFDs, spreadbetting.
With real shares your money goes into the company, boosting the share price etc. and conversely when you sell the opposite happens.
But the transaction charges and stamp duty are a killer unless you are buying and selling thousands of shares at a time.
And sometimes the derivatives companies hedge in the real market if there are huge positions open, so the derivative position can have an influence on the real market.
Also, if it were plain and simple, this question wouldn’t keep resurfacing. It’s actually a very subtle issue. For example, you are mistaken in your understanding of share investing. Nearly always, when you buy a share of a company, you are purchasing it from someone else who wants to sell the share. The company itself has no part of the transaction and doesn’t benefit from you buying the share. As far as the balance sheet of the company is concerned, it doesn’t matter whether you buy its shares on the secondary markets or bet on the price going up with Paddy Power.
‘On a philosophical note isn’t it marvelous that we have developed the most sophisticated technologies for communicating with each other, for travel and transport, for healthcare, for information systems etc. etc. and yet the cornerstone of our economic system is a delinquent and irrational casino known as the stock market. I’m no pinkie but it is surely not beyond the wit of man (or woman) to devise a more sophisticated and robust allocation of our economic resources.’ – Tom
It’s ludicrous to claim that the stock-market is the “cornerstone of our economic system”. The amounts of money involved in stock trading is a minuscule fraction of the financial transactions which underpin our economic system. The prices of stocks as established on these secondary markets have some influence on the allocation of capital but compared to the influence of debt markets, banking, fiscal and monetary policies, property markets, etc. it is small. You don’t have to look far; the 15 year boom in Irish stock prices certainly had an effect on capital allocation but compared to economic effects of the property market bubble or government spending policy, it was barely significant.
While I agree that spread betting — like guns, and even cars — can be dangerous in irresponsible hands, this does not mean that all spread bettors are ‘gamblers’…
Spread betting does not force you to bet on short-term movements any more than regular brokerage accounts do; and it is perfectly possible to hold rolling spread bets on undervalued equities ‘for as long as possible’ (but no longer) as I do — as long as the rolling financing charges are less than the capital appreciation + dividend return (yes, you get to collect dividends on spread bets too).
Also, don’t think I’m writing from a biased perspective. I’m not as biased as you might think, because I also run a regular non-leveraged ISA, SIPP etc., but I can tell you that I make more money with less risk on my spread bets.
No one looks after your money better than yourself. How many people have large amounts of money invested in pensions and investment funds and they have no knowledge of the companies they are investing in, they do not do any independent research of these companies and they are investing blindly, hoping or gambling that the financial adviser – who takes his fee(s) regardless of performance – knows what he/she is doing, which in my experience most of them do not.