Re: The difference between Investing and Gambling
qwerty
The comparison of spread betting with CFDs is only superficial. Sure CFDs are leveraged investment. So too is buying an investment property with a mortgage. The leverage increases the risk. It does not turn an investment into a gamle. Nor does the lack of leverage turn a gamble into an investment.
CFDs are virtually the exact same as borrowing money with which to buy stocks. Buying stocks is not gambling. So borrowing money to buy stocks is not gambling. CFDs are very risky, but as there is an expected positive outturn, they should still be classified as investment.
Brendan - Firstly I think you misunderstood my point about CFDs.
I completely agree with what you said in the snippet above.
In fact - if you see one of my posts from the original thread this topic started on then you will see I said teh exact same thing.
(It was in response to you saying that CFDs is gambling too - obviously you have changed your stance on that viewpoint).
http://www.askaboutmoney.com/showthread.php?t=69447 (See my post #18)
Just to clarify - I do NOT consider either spreadbetting NOR do I consider CFDs as gambling.
They are in fact virtually identical products in my eyes.
The crux of where we differ is that you do NOT consider CFDs as gambling but you DO consider spreadbetting as gambling.
You say in your previous post that what makes the difference between CFDs and spreadbetting is that over the long term the expected outcome with CFDs is positive but with spreadbetting it is not - Hence investing vs gambling.
And that is the crux of my dispute.
I ask you - What is the fundamental working difference in both investment vehicles that makes you come to this conclusion ?
I say there is no fundamental difference which could draw such a conclusion.
They are virtually identical products.
i.e. They are both geared invesments which carry a very similar charge (c.5.6% with spreadbetting - presumably something similar with CFDs) before someone breaks even.
If there is a fundamental working difference between them then can you please let me have it - my ears are open !!
Another point - see the snippet from my previous post below.
The spread that someone pays currently on rolling over 4 futures contracts in the year is c. 5.6%.
i.e. Overall your stocks must rise 5.6% in the year for you to break even.
(Note that historically the market has averaged double digit growth)
You responded to this in your above post by saying
Agreed, this looks like good value. It looks like a good bet. But it is a bet.
How can you say this?
If on the one hand we are both agreed that over the longterm the market will produce double-digit returns.
And we are also agreed that the charge of this spreadbetting service is 5.6%.
Then the obvious conclusion is that over the long term someone can therefore expect expect a net annual return of c. 5%.
This fits into your own definition of investing.
i.e. expected net returns over the long term - yet you say in your previous post that this is in fact a bet.
This appears contradictory to me.
Also - and this is possibly the best way of explaining it.
You say
If you make a long series of spread bets, then the spread will eat up your capital.
Correct - however an incorrect conclusion is being drawn by you. i.e. that so much of your capital is eaten up it puts you in negative territory
In fact - what's important is how much of your capital it eats up versus your expected average annual returns over the long term.
To reiterate - spreadbetting eats up c. 5.6% of your exposure annually..
Annual average net returns over the long tem are double digit - therefore a net average annual profit of,say,c. 6% - 8% can be expected over the long term.
Therefore Investing - not gambling.
If there is aflaw in that logic then can you please point it out.
To sum up - I think we agree on a lot of the main points - but you then you take these points and make a leap to an incorrect conclusion.
Personally I suspect that you have it in your head that spreadbetting is betting purely because the word "betting" is there, instead of thinking through the actual fundamental workings of the product and basing your conclusions on that.
On very final point - the comparison you make to sports spreadbettig is not a direct equivalent - so in case that is the basis of your thoughts on financial sptreadbetting then it should not be.
