Is Spread Betting a Form of Gambling?

By mosesbet · Filed Under Spread Betting Comments Off on Is Spread Betting a Form of Gambling? 

Is Spread Betting Gambling or Investment Trading?

Spread betting is a form of leveraged trading that allows you to wager on the future movement of financial markets and derivatives.  Since 1974 however when spread betting was created by Stuart Wheeler with the IG Index, there has been a lot of debate over whether spread betting or “spread trading” is a form of gambling or investment trading.

In the argument for spread betting being a form of investment trading, you have the fact that spread betting is a leverage form of investing which is very similar to CFD trading and Forex.  In fact, the two of so similar that most spread betting firms will also offer customers CFD trading through the same services and trading platform.

In CFD and share trading customers are buying shares aiming to make a profit off their future price, either by short-selling or going long.  For instance, you could buy 1,000 shares of Microsoft stock at 180p and sell it at 190p the next day for a £100 profit.  However if you placed a bet of £10 per point through a spread betting broker such as City Index you’d also earn a £100 profit.  Thus, the outcome from share trading and spread betting can be virtually the same.

The problem for spread bettors is that with share trading you are purchasing a set amount of shares which includes dividends.  You have bought a physical, tangible asset which can be sold on the market.  The maximum that you can lose is the price you paid for the shares.

In spread betting however, your losses are unlimited.  You do not own any tangible assets.  This is why the FSA and many other investors in the city consider spread betting as gambling.  If your losses are unlimited and you are merely betting on the movement of the financial derivatives through a 3rd part than of course it’s gambling.

One issue is how do we define gambling?  A representative from MF Global Spreads stated that any traded product or financial instrument is gambling.  You don’t know the outcome in the future and you could just as easily lose or win money in share trading.  This is the very definition of speculative trading.  So what difference does spread betting make?  This is an argument I have been promoted in the past because it makes A LOT of sense.  For example, do FX traders in the currency exchange markets really know any better than spread bettors?  After all, most spread bettors are still educated city traders on a income of more than £50,000 per year.  Spread bettors use the exact same technical tools and indicators (such as Bollinder Bands and Moving Averages) to predict the movement of stock prices.  So how can it really be classed as gambling?

The definition of gambling according to the FSA and UK government is when the broker has better odds or a “house edge” on customers.  The spread in spread betting (the difference between the “ask” and “bid” price) is how the broker earns a commission.  This gives the broker a house edge, making spread betting another form of gambling (just think of it as the casino having a house edge on the players).

Conclusion: Is Spread Betting Gambling?

You’d have to agree with the FSA that spread betting is a form of gambling.  Spread betting fits the bill for gambling – because the broker has a house edge – and the fact that you never physically own the underlying financial assets means you are just betting on their movement.

What I think is the most important part of the debate however is that if spread betting wasn’t classed as “gambling” than the profits from spread betting would lose their tax-free status.  Since tax-free profits from Capital Gains and Stamp Duty are one of the biggest reasons spread betting has grown so much in the UK (over 30% per annum), I believe the argument to be defunct.  If spread betting is eventually re-considered a form of investment trading then profits will suddenly become taxable and the industry will presumably die.

For more articles and discussions on the same topic, see http://www.trade2win.com/boards/spread-betting/78808-spread-betting-form-gambling.html or http://www.financial-spread-betting.com/Spread-gambling.html.

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