Is financial spread betting gambling or investing?

[z106]

Z, you are including the cost of borrowing, but that is not a charge, it can be cancelled out and even better in today's conditions by depositing the leverage. The spread plus the interest on margin are the only charges.

That's an interesting way of looking at it alright harchibald.

So basically - if someone wants to enter an unleveraged position then they should not buy shares from a broker so ya as they will avoid the tax and any (higher?) fees?
Am i understanding you correctly?

 

[Duke of Marmalade]

So basically - if someone wants to enter an unleveraged position then they should not buy shares from a broker so ya as they will avoid the tax and any (higher?) fees?
Am i understanding you correctly?

Yep, keyboard. I find the leverage thing a bit of a red herring. Say I do buy (I haven't yet) 10 units of Eurostoxx 50 March '08, I will see myself as having 40K worth of stock, on which I owe the money. But I happen to have a wee bit more than that on deposit with the Irish Nationwide earning 5.1%, so in aggregate no leverage. Normally back to back deposits/loans involve some financial intermediation slippage but in today's conditions that actually is a positive, though after DIRT we're back to near neutrality.

The spread is 1 per mil, that covers wholesale spread, Delta spread and borrowing spread. And it appears I can roll that over quarter to quarter at 0.5 per mil.

An even bigger tax saving than CGT is that divies are only taxed (implicitly) at the wholesale market rate (Delta suggests 20% as typical) and not at the 43% for an individual.

I am going to test it on 1 unit just in case I am missing some slippage on the roll-over, its the sort of question you can't be absolutely sure of the answer until you put your fingers in the wound.

 

[Duke of Marmalade]

www.igindex.co.uk is by far and away the best. they have everything on there and tight spreads too.

I signed up to this today. It is absolutely the business. Spreads are half those on Delta which in themselves seemed too good to be true. There is no other way to invest in the stockmarket.

 

[z106]

I signed up to this today. It is absolutely the business. Spreads are half those on Delta which in themselves seemed too good to be true. There is no other way to invest in the stockmarket.

I tried tos set up an account but must send over some docs.

Have u actually signed up completely?

DO u have to lodge money in your account before you can view their platform/charts/prices etc.?

Also - out of curiosity,one problem i have with worldspreads is that many (not all) of their charts only go back a few weeks.

Did delta index have the same problem?

DO igindex have more conclusive charts?

 

[Duke of Marmalade]

Have u actually signed up completely?

DO u have to lodge money in your account before you can view their platform/charts/prices etc.?

Also - out of curiosity,one problem i have with worldspreads is that many (not all) of their charts only go back a few weeks.

Did delta index have the same problem?

DO igindex have more conclusive charts?

Signed up completely in a few hours. Faxed copy of passport and utility bill. Made a mess of faxing otherwise could have all been done within an hour.

No money lodged yet, complete access to their site.

Their charts are the exact same as Deltas, but they take for ever to load, maybe a fault at my end.

Not sure about depth of Deltas charts.

 

[Zoran]

Z, you are including the cost of borrowing, but that is not a charge, it can be cancelled out and even better in today's conditions by depositing the leverage. The spread plus the interest on margin are the only charges.

OK, so you are actually removing the cost due to the money market profit on the rest of the money.

Would you show me the long term formula for this?

I am just saying that from the short term perspective (6-12) months that looks profitable. The problem is you have no clue what will happen with the market in 6-12 months so you are taking the risk.
Long term means more then 10 years otherwise it is market timing.
If you need money in 1 or 2 years then why risk with equities and not go with just money or bond type of market?

Of course we all want to be wealthy fast but that is not possible with efficient markets
If this is something that is working or will work for a long time believe me it will already be exploited so the market will price it already so it will not work in the near future (even if you believe it should work now).

So, go and hurry if you think it is working for you now

 

[Zoran]

The stock market is a gamble, pure and simple- whatever way you play it is up to you. a person that says he is investing in a company is talking rubbish as the average person that gives money to a broker does not know anything about the company they are "investing in". they are just "betting" that the price of the stock goes up.

It is not if you own the market through the passive (cheap) indexed managed funds/ETF's.
You need to own it for at least 10-15 years to get the equity risk premium (to profit from the stock market) for a sure.

what way you chose to play it is your choice but i prefer to spread bet as i dont like paying commision to some guy in a brokers office that hasnt a clue what hes talking about and paying CGT on winnings.

You shoul dnot be paying CGT if your money is invested through the pension as it should be for majority of your money.
Even money outside your pension you are saving for a long time should be long term buy&hold so no CGT except at the end (apart from rebalancing the positions to keep the percentages between the funds the same as when you started)

Most of the "experts" talk rubbish - pure and simple. at start of last year they predicted another great year for the irish stock market, what happened, it lost 20% and was one of the worst performing indices in the world. people who say they are technical analysts are just guessing.dont be fooled by them

I agree that it is sale hype, CNBC, Bloomberg, brokers, banks, active money managers, spread betting brokers and others.
They are all earning due to people thinking they can beat the market.
You can hardly hear anything about passively managed indexed funds/ETF's anywhere.
Do you know what is that?

Irish Market is less then 1% of the world market and you need to be full to have more then 1% of your money invested in the Irish stock market.
You need nice portfolio of diversified passively managed funds (or ETF's).

 

[Zoran]

I signed up to this today. It is absolutely the business. Spreads are half those on Delta which in themselves seemed too good to be true. There is no other way to invest in the stockmarket.

So, how you are going to beat my e1000 I put into the pension.
You have either e800 or e550 after tax.

So, how are you going to beat my e1000.
Tell me such investment.
I know the answer, it is spread betting

OK, now.
I have e1000 after tax
and I invest into world marker index.
You do the same with the spread betting.
You are thinking you are better.
So what happens if the market next two years is -10% and -10% and then goes up after it?
What will happen with your money earning you the interest? Is it going to be the same or you need 3x your deposit to be with the spread betting company.

OK, now the better part is around volatility. You can be -10% at the end of the year but the biggest drop may be -30% like in today's market so you need to have a half of your money with the spread betting company and a half of the money in the money market.

The other fact: the money market is negatively correlated to the stock market? Does this mean that your calculation can change over time?
E.g. stock market starts growing, then futures prices starts growing making your spread betting cost higher while money market starts giving you less.
Is that the risk?

 

[Zoran]

DO igindex have more conclusive charts?

They do not for the futures. The futures charts are just showing the period that future covers (e.g. 3 or 6 months).

You have no clue what was the historical price so I cannot for example prove to Harchibald that this strategy did not work in the past.

Also, do not forget that spread betting is too new to have any long history.
What I know from the history is that spread betting costs before were very high and money market (Irish one) was giving you 2-3% so was not good in the past.
Was it going to be in the future?
Do not think so as the market is very efficient.

 

[Duke of Marmalade]

Z, nobody is arguing that FSB is the sure way to riches.

It is the basic theme of AAM that passive investment is superior to active and that charges are the main differentiator. Hence QL Freeway is the darling of AAM.

I am sympathetic to that view but my case here is that FSB is cheaper and more tax efficient than even QL. Do you agree?

 

[Zoran]

Z, nobody is arguing that FSB is the sure way to riches.

It is the basic theme of AAM that passive investment is superior to active and that charges are the main differentiator. Hence QL Freeway is the darling of AAM.

I am sympathetic to that view but my case here is that FSB is cheaper and more tax efficient than even QL. Do you agree?

I agree that QL freeway funds are passively managed but their charges are like active management funds.

Huh, you are putting me in the bad position to choose between two brokers who are charging a lot

I assume that is one of the reasons why spread betting is so popular too.
I hope that spread betting if nothing good will bring more competition to these greedy brokers (e.g. Davy and others charging 0.75% per transaction and similar so you cannot buy cheaply even cheap ETF's).

Once again they are just making (or trying to make) investing game on the short term negative sum game.
I hope some big and good investment company will arrive to Ireland and wipe them all.

 

[Zoran]

This is an easy link to read some facts about investing and read what some big names as Buffet and others has to say for individual investors:

http://www.ifa.com/12steps/

 

[Duke of Marmalade]

So what happens if the market next two years is -10% and -10% and then goes up after it?
What will happen with your money earning you the interest? Is it going to be the same or you need 3x your deposit to be with the spread betting company.

Z, you've got that wrong.

The cash balance sheet at any time is as follows:

Cash in Bank = Cash owed on Futures - Margin

The "dead" money is the Margin. Losses increase Margin until the next roll-over at which time you settle and the Margin is reset at the normal level, and the above cash balance sheet is reduced.

The point is you only lose money on losses until the next roll-over, because at that roll-over the borrowings needed to refinace the futures has fallen.

 

[Zoran]

Z, you've got that wrong.

The cash balance sheet at any time is as follows:

Cash in Bank = Cash owed on Futures - Margin

The "dead" money is the Margin. Losses increase Margin until the next roll-over at which time you settle and the Margin is reset at the normal level, and the above cash balance sheet is reduced.

The point is you only lose money on losses until the next roll-over, because at that roll-over the borrowings needed to refinace the futures has fallen.

If you split the investment period in 4, 16 or 100 pieces where you need to settle it in real money without the ability to choose is it good or bad moment to settle it is not the same as doing nothing and having paper losses.

Also relying that the money market will cover your future premium you need to pay is not looking smart for me.

Did you try your method yet or this is just theoretical (sales) story?

 

[Duke of Marmalade]

Did you try your method yet or this is just theoretical (sales) story?

Z, will you drop the conspiracy angle please. I have not been given any sales pitch and I certainly am not doing any pitching myself.

I am only new to FSB thanks to this thread. It looks very very good to me, esp. IG, but I am not deaf to your constant mantra that there's no easy money for small guys like me.

BTW my only dabble so far was a small punt on Irish Life at 9.74 now trading 2 euro higher Or maybe that is just a sales trick by Delta to lure me in.

 

[Zoran]

Z, will you drop the conspiracy angle please. I have not been given any sales pitch and I certainly am not doing any pitching myself.

I am only new to FSB thanks to this thread. It looks very very good to me, esp. IG, but I am not deaf to your constant mantra that there's no easy money for small guys like me.

BTW my only dabble so far was a small punt on Irish Life at 9.74 now trading 2 euro higher Or maybe that is just a sales trick by Delta to lure me in.

Sorry Harchibald. I know both of us are trying to do something meaningful.

I think we should agree that neither of us is with good knowledge of futures market so we are going around.
It is for a sure very complex and believe me it is looking great now as the market is in tumble and futures are a bit lower then usually.
Even I read a couple of books I did not invest in futures market directly due to the knowledge and money constraints in such market.
Spread betting account you got in 1 day so be careful

If we have the historical data of futures market (you need to pay for such) and money market for Ireland then we will be able to calculate things.

I am going to ask some people around who might help with this question.

 

[Duke of Marmalade]

This is less likely as you need to beat efficient market and small percentages of pros who are really making money.

Z, Nick Leeson, John Rusnek, Merton Scholes, Jerome Kerviel - are you sure the pros/Nobel Prize winners have an edge?

I used to wonder how someone a wet week out of university could earn massive bonuses as a trader. I had a few ideas but as shown below I am not so sure they are still valid:

1. They had the economies of scale of trading on behalf of huge institutions.

Seems to me that with FSB I have very similar costings even maybe an edge as my deals will never be refused whereas large deals might have to compromise.

2. Access to sophisticated technical analysis.

The charting tools that are available on FSB seem very sophisticated to me.

3. Access to Nobel Prize winners.

Not convinced this is a huge edge.

4. Ability to balance a phone on each shoulder.

With the internet this is now a redundant skill.

5. Nerve to wear red braces.

This is what put me off going into trading myself. But with FSB you can operate from the privacy of your own home, in polka dotted underpants if you chose.

 

[Zoran]

Z, Nick Leeson, John Rusnek, Merton Scholes, Jerome Kerviel - are you sure the pros/Nobel Prize winners have an edge?

I said a few of them and did not say for a long term
Pros are fighting between themselves. Around 80% of market is traded by pros. Every year different pros (or funds) may win but not consistently.
If you have 10000 fund managers and each of them are throwing the coin (as somebody will beat the market index and somebody will loose) then 50% will beat the market this year. Next year it is 25% and after 10 years you will have 10 find managers (pros) who will beat the market after 10 years.
Is this luck or knowledge is hard to judge but the history shows that it is more luck as there are so many examples these Nobel and other smartest guys lost money in 11 year or whatever year

I used to wonder how someone a wet week out of university could earn massive bonuses as a trader.

They are all playing with our money. It is easy to be fund manager or trader when you are trading with somebody else's money for crazy management fees. I think we do not have enough jails for these guys.

I had a few ideas but as shown below I am not so sure they are still valid:

1. They had the economies of scale of trading on behalf of huge institutions.

Seems to me that with FSB I have very similar costings even maybe an edge as my deals will never be refused whereas large deals might have to compromise.

They are brokers (or bookies) so they put the bet in the middle so they earn money from the spread and from the interest of borrowing money.
It is hard for them to loose if they are not taking the bet themselves (e.g. not hedging or having crap prices)

2. Access to sophisticated technical analysis.

The charting tools that are available on FSB seem very sophisticated to me.

I believe they will start giving 10% back of losses just to have you on board For them it is the winning game as for all brokers. Once they start trading themselves they may go out of the game.

3. Access to Nobel Prize winners.

Not convinced this is a huge edge.

It is better edge then what you and me are having.
We have almost nothing. Struggling to backtest our buy&hold theory based on the futures. They can test such thing overnight.
If somebody is reading our posts they may be laughing.
The problem with them is they are fighting themselves, big pros with all that massive computer and intelectual power.
For me this is no win game.
But I will be better then majority of this active managers as I will be passive and invested in long term buy&hold that will give me the profit as the index I am tracking.

4. Ability to balance a phone on each shoulder.

With the internet this is now a redundant skill.

Believe me, still if you have 1M to buy something you will call the broker as he can buy you things much cheaper.
I have seen on the brokerage SW recently somebody bought 200M of City stocks in around 10 seconds filled.

5. Nerve to wear red braces.

This is what put me off going into trading myself. But with FSB you can operate from the privacy of your own home, in polka dotted underpants if you chose.

Internet is like the new member of your house. You spend your money with 1 click of mouse (e.g. buying book).
Or even gamble the money so easy (investing of course).

 

[Duke of Marmalade]

Z, you obviously know your stuff. That spreadsheet was very comprehensive.

I prefer to stick to my simple proposition which is that FSB seems a more tax effective and more cost effective way to have a long term passive holding in Eurostoxx 50 than QL Freeway.

I don't want to confuse the matter by considering whether that particular index is a good investment. It may be that there are other ETF strategies which backtest better, but are they better in terms of taxes and charges? The spreadsheet doesn't tell me this.

In fact, backtesting is really not relevant to determining charges and taxes. I accept that with FSB one is relying on the current position prevailing in the future, but if it is better now why start off on the inferior conventional model? You can always switch later if conditions deteriorate and start to favour the Life Fund.

 

[Zoran]

I prefer to stick to my simple proposition which is that FSB seems a more tax effective and more cost effective way to have a long term passive holding in Eurostoxx 50 than QL Freeway.

In fact, backtesting is really not relevant to determining charges and taxes. I accept that with FSB one is relying on the current position prevailing in the future, but if it is better now why start off on the inferior conventional model? You can always switch later if conditions deteriorate and start to favour the Life Fund.

Do you know why is Eurostoxx 50 future that cheap at the moment?
Did you look that top 10 dividends companies in such index are giving from 3.4 to 6.1% dividend.

I do not think you did your mathematics properly.
I am invested in Euro passive index with IL for 0.75% in my pension and that is cheaper then 1% of Quinn. No exit and entry charges neither.
Also no CGT as it is pension and I have immediate gain of 80% or more as I am not paying the higher tax to the government.

I agreed already that QL is crazy expensive for passive funds. The same is for others as I found 0.75% to be the cheapest.
Also have no clue are they good as Vanguard passive funds.

My last two sentences are out of the context but it is hard for me to see the long term buy&hold huge investments going outside the pension due to CGT problems (except if you borrow money against your mortgage or it is just your emergency/scholarship fund)

If I have big money outside pension (like more then 100k) I will be insane not to put that money with Vanguard Ireland and pay 0.1% per year in charges and own the market passively.

Give me the formula with dividends calculation included for Eurostoxx 50.
Show me mathematically that rolling something 2 or 4 times per year is not going to deteriorate the result.
It is easy to think in the head like: oh it is cheaper and looking cheaper.
I will believe you when you present me some mathematics, real one.

Even you are correct I am not seeing this possibility last long enough to be good long term buy&hold candidate as big money will see such inefficiencies and try to use it and of course that will lead to well known efficient market.

Also CGT is not a big problem for long term buy&hold as you should not be selling except when doing rebalancing to keep your percentages tight.
For that you have the means of selling one passive fund/ETF and buying other one so keeping your CGT payments at e0 (easier with ETF's).

If you are going to be in Eurostoxx 50 or anything else invested just 1 year then you are the market timer and I will not consider that investing for the individual investor.