Spread Betting Gambling
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Spread Betting Gambling
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A: This is what James from ODL Securities had to say when we posed him this question:
'Spread Betting is very similar to trading in shares. If you bought 1000 shares of Vodafone with a stock broker at 170p and sold them at 180p then you would have just made £100 profit. If you bought £10 a point Vodafone bet with us at 170p and sold at 180p then you would have made £100 also (£10 won per 1p movement in the share price). Therefore your exposure to gains/losses is the same in spread betting as share trading (not taking commission and spreads into account). Obviously if the share price had fallen to 150p then you would have lost £200 with your broker, and you would also have lost £200 on your spread bet with us (£10 lost per 1p movement in the share price).'
James further adds 'Spread Betting under UK law is considered gambling, which means it has the benefit of any gains you make being free of income and capital gains tax (tax laws can change). Although officially deemed gambling, the mechanism of spread betting is extremely close to that of CFD trading, which is considered speculative investing. Therefore many of our clients benefit from trading in a similar fashion to CFD trading and enjoy the benefits of any gains they make being tax free. (both spread betting and CFDs are leveraged trading and you should be aware of the risks).'
'Is it a good idea to put £20 on the 2.30 at Kempton [Park horse racecourse]? Is it a good idea to give your money to Mr Madoff? People have been betting or gambling since the world began and I think spread betting is just an extension of that.' - Frank Chapman - CEO of London Capital Group
Undoubtedly the 'betting' label does seem to create some prejudices and spread betting may still have an image problem; and one of the reasons for this is that it's not only the ordinary investor who's got a problem with it. It's the stockbroking community who perhaps haven't initially understood CFDs or spread betting, and have probably passed on that message to the ordinary clients and investors. And whether they meant to or not, discouraged them from expanding their portfolio of products and diversifying their risk.
With regards to the last point, many are under the false impression that the longer you leave your money in the market the safer it will be. This is like saying the longer you leave a toddler on the M25 the less likely something nasty could happen... To continue this analogy, a long term investor puts the toddler down, walks away for a few years and comes back to see what happened. A trader will become intimately aware of the nature of the traffic flow and after many years of study, day in day out, put the toddler down at 4 am in the fast lane and keep his eyes peeled for the first sign of headlights.
Spread Betting is simply another mechanism to speculate on movements in markets and the gains and exposure are equivalent to those in the underlying markets, such as shares. As you can see from the example in the first paragraph, you are in a very similar position spread betting to investing in shares, therefore spread betting is no more a zero-sum-game than speculating in share trading itself. Therefore, if you believe share trading to be a zero sum game then spread betting is also.
A spokesman from ODL Markets commented:
'Whether you lose money in the long run is based on a number of factors, but unlike say a casino that has a house edge, we have no such thing, we simply charge a spread which is equivalent to the commission you pay to purchase/sell shares. I have been involved with spread betting for a number of years and many clients made considerable amounts over the years, equally many have lost considerable amounts. The capacity to make/lose money was based on experience, knowledge, ability, skill, luck and countless other attributes.'
'Whether you consider spread betting as entertainment or a valid investment mechanism is down to how you intend to approach it. In a similar fashion to share trading, a small number spread bet for entertainment but the vast majority spread bet as an investment tool. Clients spread bet to gain similar exposure to the markets as speculative investing, but in a tax free mechanism. If you chose to spread bet then the reasons to do so should be based on what you are most comfortable with'.
Meanwhile another spread betting industry commentator stated:
'Strictly speaking all trading in any traded product or instrument is gambling. You do not know the outcome when you set out. You are hoping to increase your chance/odds using knowledge and information.
The advantage of spread betting being classed as 'betting' is that there is no capital gains tax to pay on profit. Also there is no stamp duty (0.5% on stock purchase with actual shares) on spread bets.
Spread bets are an instrument which can be used for outright 'bets' on the market or as a hedge against a position, for example:
Meanwhile Steven, an experienced long term investor commented:
'I do believe spread betting is gambling. There is quite some difference between spread betting and investing. When you invest you a) get a share which you can then sell at some point in the future, b) get a dividend on that share (editor note: you still get the benefits of dividends in spread betting ) and c) lose at the maximum the cost of that share. When you spread bet you a) get no tangible asset, b) get no payout except the final difference between the price and your spread and c) can lose an unspecified amount'.
Entertainment: A lot of people consider 'playing' the markets entertainment, whether they are trading conventional shares, spread bets, etc. I guess that comes down to the individual and how serious they are about their trading. Not to say you can't be very serious and still be entertained analyzing the markets and trading on the back of that, formulating your own 'style' over time.
A lot of serious investors use spread bets for a multitude of reasons. One of these is certainly the geared nature of the products. For example FTSE 100 stocks require just 5% to cover the position. i.e. which means that a £10,000 stock spread bet can be opened with just an initial deposit of £500. This allows greater flexibility of funds. But of course the trader has to be aware of the risks involved with gearing and manage their position likewise.
There are some people who use spread betting for a little fun and a flutter on the stock markets, but most people will want to take it seriously. In the end most want to spread bet to make money, and making money should be a serious business.
Does anyone buy or 'invest' in companies to make a loss, of course not...they buy stock with the hope it will go up (unless you short it ). They are betting that it will go up (unless one buys companies for their yields). If you ever read the great book about the legendary trader Jesse Livermore, he comments that 'the stock market is the greatest gambling arena of them all'. Comparing spread betting to shares trading one can say that spread betting is equivalent to short-term speculative trading, as opposed to gambling.
I would also say that very short term holding of shares is gambling. Short term holding of CFDs is also gambling. If you gear up ten-fold then you are also gambling because of the potential volatility - of course you could be knowingly having a calculated punt but you should not try to dress it up as an investment! Thing is derivatives be them futures, options, spread betting or CFDs can be used as an alternative vehicle for investing if you know what you're doing and have a winning trading method with an edge against other players in the game.
A good strategy and sensible risk management can go a long way here. Let's for instance assume that your trading system wins 40% of the time which means that you lose out on 6 out of 10 trades. You will risk an amount, say £X and aim to make double of that amount; £2X. In the space of 10 trades, on average, you will lose £6X (the equivalent of losing 6 times) and win £8X (you've won 2X 4 times). That still amounts to a net gain of £2X. You will also want to ensure that X (amount to risk per trade) amounts to no more than 2% of your total trading pot so you can lose up to 50 times in a row (i.e. survive losing streaks) before ending wiped out.
And if having the word betting in the title conveys the benefit of tax free profits and losses (under current UK Government legislation) then so be it. Remember that profits from other financial derivatives such as traded options or contracts for difference are taxable.
All investments are to some extent a gamble. Investing can certainly amount to gambling when you just go in on a couple of stocks as a bit of a punt, hell I bought £5000 worth of RBS shares at 10p a share, I'll happily admit that was a gamble and I didn't advise anyone that it was a good way to make money. However if someone was to go into shares in a big way, buying substantial sums in 10-20 different companies so as to eliminate as much risk as possible whilst reducing transaction costs (as a relative amount) to the minimum then I probably wouldn't call that gambling. However, even putting cash on deposit in a bank account, you're gambling the after-tax interest will be enough to preserve the inflation-adjusted value of your money (and in recent years this has mostly been a losing bet...). So even if you consider spread betting gambling - which to some extent is true for all forms of trading as nothing is certain, but some people are better at it than others - maybe you'll be one of them, maybe not, just don't ever get into a position where you cannot afford to lose. Everything comes with a degree of risk at the end of the day. Arming yourself with facts is the best way about it. I don't see why some people have a biased attitude to begin with as I'm sure they were in the shoes of a beginner at some point...that's all.
Ok, so gambling is probably the wrong word, but if we're really honest, that's what it is isn't it? After all, for a share to have a value you need (in very simple terms) the same number of people/money thinking it will go down (selling) as there are people/money who think it'll go up (buying). After all, if everyone is a seller, the price will fall till those numbers equalise, and the same if all were buyers. So every share sits at a level where you've got about the same amount of money in the system expecting it to drop as expecting it to rise. So really it's something of a gamble as to which it will do. I guess the trick is to try and make a more informed gamble... Start with Reminiscences of a Stock Operator .
'The idea of spread betting is foreign to some markets' psyche. 'The betting side might suggest leisure activity,' Tim Howkins CEO of IG Index explains. 'In certain markets the notion of betting on stocks is some sort of crazy English idea. To them it is serious. It is serious investing.'
Spreadbetting can be viewed as gambling or trading depending on the approach that you yourself take. People use spread betting for different purposes. Some clients are gamblers, some are speculators, some are hedgers and some are experienced traders.
There is no one definitive way to trade the markets. You can trade intra-day, or hold and build positions for a few days, weeks, months or even years depending on your view, timescale and available finances. The spread that someone pays currently on rolling over 4 futures contracts in the year is c. 5.6% (this means that your stocks have to rise 5.6% in the year for you to breakeven). I prefer not to think of FSB as a leveraged investment but as buying shares/indexes for settlement at some future date. Clearly, if you are paying at some future date the price should reflect the cost of that credit.
If you are new to trading my advice would simply be the following. Study the markets as much as possible, learn some technical analysis and find a 'system' that you feel comfortable with, don't over leverage yourself and start small...Remember 80% of traders will lose in the long run. Sound money management, and discipline are imperative. No point making 50% today if you lose it all tomorrow and go bankrupt. I would also suggest having a plan for a trade before even consider opening that trade...
Trading can be risky, often stressful and sometimes almost impossible. Having said this however it can also be hugely rewarding, exciting and fascinating. Ultimately if you don't have a trading strategy spread betting can be a form of gambling, that said if you have a tested strategy in the market and you have risk management skills it can be used very effectively to your advantage.
There is a difference between buying a payout in acceptance for risk from an exchange, and buying a payout in acceptance for risk from a counterparty. But to say that one is trading and the other is not is just plain ignorant. Each have their benefits - through an exchange I eliminate the conflict of interest (to the best degree possible), and through a spread betting firm I can tailor the size of the payout to suit my own particular propensity for risk. These are significant differences, but they share exactly the same principals of RISK and PAYOUT. Trading, or betting, is about finding opportunities, whereby one considers the PAYOUT and the RISK to be mismatched, and acting to profit.
A: The Financial Conduct Authority puts spread betting (sometimes referred to as spread trading in the UK) under the gambling category as the odds are in favour of the brokerage company due to the spread. This means that a win is technically a prize and not a win so the money doesn't have to be declared to the Inland Revenue. And of course this means that all winnings are tax-free! With spread betting there is a good chance you're able to make or lose significant amounts of money so it is imperative that you are cautious with your money and don't act rashly.
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Sports Betting Strategy: Spread Betting
Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.S. Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders.
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Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
Forex (FX) is the market where currencies are traded and is a portmanteau of "foreign" and "exchange." Forex also refers to the currencies traded there.
A bear put spread is a bearish options strategy used to profit from a moderate decline in the price of an asset. It involves the simultaneous purchase and sale of puts on the same asset at the same expiration date but at different strike prices, and it carries less risk than outright short-selling.
A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative.
Covered interest arbitrage is a strategy where an investor uses a forward contract to hedge against exchange rate risk. Returns are typically small but it can prove effective.
A bull spread is a bullish options strategy using either two puts or two calls with the same underlying asset and expiration.
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Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.
As in stock market trading, two prices are quoted for spread bets—a price at which you can buy (bid price) and a price at which you can sell (ask price). The difference between the buy and sell price is referred to as the spread. The spread-betting broker profits from this spread, and this allows spread bets to be made without commissions, unlike most securities trades.
Investors align with the bid price if they believe the market will rise and go with the ask if they believe it will fall. Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits.
If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the 1940s has been widely credited with inventing the spread-betting concept. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. A City of London investment banker, Stuart Wheeler, founded a firm named IG Index in 1974, offering spread betting on gold. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it.
Despite its American roots, spread betting is illegal in the United States.
Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's assume a purchase of 1,000 shares of Vodafone (LSE: VOD ) at £193.00. The price goes up to £195.00 and the position is closed, capturing a gross profit of £2,000 and having made £2 per share on 1,000 shares. Note here several important points. Without the use of margin, this transaction would have required a large capital outlay of £193k. Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty.
Now, let's look at a comparable spread bet. Making a spread bet on Vodafone, we'll assume with the bid-offer spread you can buy the bet at £193.00. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary.
In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. We'll now assume a buy or "up bet" is taken on Vodaphone at a value of £10 per point. The share price of Vodaphone rises from £193.00 to £195.00, as in the stock market example. In this case, the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is the same in the two examples, the spread bet differs in that there are usually no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other European countries, the profit from spread betting is free from tax.
However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets. Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost .
In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. In the stock market trade, a deposit of as much as £193,000 may have been required to enter the trade. In spread betting, the required deposit amount varies, but for the purpose of this example, we will assume a required 5% deposit. This would have meant that a much smaller £9,650 deposit was required to take on the same amount of market exposure as in the stock market trade.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher.
Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses .
Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns.
Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited. However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads.
At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur profits from the gap between the two. Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return.
Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities. While arbitrage is typically associated with risk-less profit, there are in fact risks associated with the practice, including execution , counterparty, and liquidity risks. Failure to complete transactions smoothly can lead to significant losses for the arbitrageur. Likewise, counterparty and liquidity risks can come from the markets or a company’s failure to fulfill a transaction.
Continually developing in sophistication with the advent of electronic markets, spread betting has successfully lowered the barriers to entry and created a vast and varied alternative marketplace.
Arbitrage, in particular, lets investors exploit the difference in prices between two markets, specifically when two companies offer different spreads on identical assets.
The temptation and perils of being overleveraged continue to be a major pitfall in spread betting. However, the low capital outlay necessary, risk management tools available, and tax benefits make spread betting a compelling opportunity for speculators.
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