Is financial spread betting gambling or investing?

CFD's are a short term trade, and as with all short term day trading or short term leveraged property buying/selling by individuals I consider these to be gambling. CFD's are also leveraged and so carry a similar risk to spread betting I think. I have read that CFDs are banned in the USA?

Spread betting does not pay dividends although might make some soirt of adjustments which net out to almost nil, as the share price falls after it goes exdiv, and I think you will find out that you lose out because of this. Although spread betting should not be used for long term investing anyway, the financing costs itself make it not worthwhile.

As for the spreadbetting is 'free of tax' argument, if you are making losses then free of tax is not such a good deal anyway, as no tax to pay! If it was taxed and losing spreadbets could then create tax losses which could offset other income it might be better for most if it was not tax free! But I expect you will find that at least here (UK) that the Government will not tax spread betting as with other gambling I am sure they are aware that more people lose money than win, so it may cost them more in tax relief for the losses of the majority than they would earn from taxing the gainsof the minority:)
 
I agree with keyboard. Spreadbet has repeated well worn prejudices against FSB. Let me attempt to debunk these with a simple example.

Delta is currently quoting 12583/12595 for S&P December futures. Let us take a long position of 1 € of these. What economic interest do I have?

I have the upside of €12,583 worth of S&P "shares" including their dividends.

The spreadbetting fees are €12 in the first quarter and €6 per quarter thereafter, i.e. the spread - this is the bit most people don't get, the spread on a future is the only fee suffered and includes costs of leverage. Annual fees therefore €30 in year 1 and €24 p.a. thereafter.

I need to deposit €350 so that is an annual loss of net interest of say €12.

Total annual cost €42 year 1 and €36 p.a. thereafter = 0.3% p.a.

Gains are tax free and the effective tax rate on dividends is 20%. Another advantage is that there are no exchange costs, the transaction is performed in Euro.

Even as a long term proposition no other alternative comes near to FSB in giving such cost and tax efficient exposure to an index like S&P. Other indices are similar if not quite so spectacularly cheap.

Individual shares are more expensive and a rule of thumb is that if you intend to hold for more than 3 years direct ownership might be better.

A few other myths need debunking. FSB does not make its money because on balance its customers lose. It hedges every transaction. In a bull market the majority of FSB customers win because they are generally long. This is the exact same as for stockbrokerage.

It is true that gambling is not subject to CGT because the Revenue would be a net loser. FSB exploits this by couching share investment in the language of betting, but make no mistake the Revenue would like to subject FSB to CGT just like direct share ownership, because in the long run share ownership and FSB makes gains for its participants.
 
Harchibald,

And if the index faslls 351 points at ANY time after you make your bet, likely in market volatility, you are wiped out. Repeat this several more times and you could easiliy lose thousands.

And this assumes you have a stop loss. Without a stop loss you could lose thousands in a day a few days. Markets do not go up and down in a linear fashin, even bull markets.

Best hope that you either are able to risk a large amount of capital to bet without a stop loss (in this case a bear market could wipe out a large part of it), or have the foresight to buy into a bull market that never goes down by a small amount at ANY time after your bet. Most people cannot afford the capital to do the former, the latter is simply a big gamble IMHO.

This ignores, costs such as financing, margin, dividends etc. By the way some people buy shares for income (cash dividends) not for capital growth. Spread bets do not pay you cash dividends, no matter how prices might be adjusted.
 
Spreadbet, I clearly don't explain myself very well.

My example is economically identical with having €12,583 invested in the S&P, being charged 0.3% p.a. (all in, including spreads, margins, leverage etc.) and enjoying dividends net of 20% tax and free of any CGT.

Talk of being wiped out misses the point as the risks of being "wiped out" are exactly the same as those attaching to €12,583 direct investment in the S&P.

You also seem to take the view that unless you receive your dividends in the post they should be ignored. :(

Because of the high leverage, the situation needs a bit of managing to make sure one is not automatically stop lossed, a small burden to suffer for the extremely cost and tax effective access to S&P tracking.
 
Spreadbet - I think we have to define what gambling and investing is first.

Brendan gave a good definition earlier in this thread that i would agree with (or it may have been another thread).

He said:
Investing is something which if you do over the long term you can have an expected positive return.
Gambling is something which if you do over the long term you can have an expected negative return.

I for one think that is a good way fo defining the difference between both..

Firstly - do you agree with these definitions first?
Because we all at least need to know what exactly we are arguing about.
If you don't agree with these definitions then can you put forward your own definitions please.

Assuming you do agree with these definitions, then lets move on from here.

You seem to focus in on the leverage factor.

Just to clarify - is the leverage factor the primary reason that you deem it gamblng?

If not, then what is the primary reason you deem it gambling?

Spreadbetting certainly can lead to big losses - that doesn't mean it will lead to big losses.

Many people use a successful trading strategy.

Yes - many people also lose.
However - the reason is because they do not use a good trading strategy.
Not because they use the vehicle of spreadbetting to apply that trading strategy.

To sum up - you shoud look on a spreadbetting company as your broker.
It really is no different than that.
 
Keyboard, I suggest that the definition needs a little refining as follows:

Gambling is where the risk of loss is disproportionate to the expected return.

Clearly it is necessary that the expected return is positive to avoid being gambling, but this is not sufficient. €1m bet on the toss of a coin to win €1M + €1 is still gambling in my book despite the positive sum game.

Now when it comes to stock trading I believe that all short positions have a negative expected return so short selling is in my book always gambling (unless hedging a direct long position).

Long positions should have a positive expected return but if the position is only very short term the risk would be disproportionate to the small positive expectation. In my book short term long positions are also gambling.

Of course, the Boss' definition is a bit more subtle, it refers to performing an activity over the long term. Perhaps a persistent strategy of short term long trading is in the long term investing after all, if you see what I mean.:confused:
 
Harchibald said:
Now when it comes to stock trading I believe that all short positions have a negative expected return so short selling is in my book always gambling (unless hedging a direct long position).


Of course, the Boss' definition is a bit more subtle, it refers to performing an activity over the long term. Perhaps a persistent strategy of short term long trading is in the long term investing after all, if you see what I mean.:confused:
Click to expand...

Ok - i'm prepared to go along with your theory that the return most be sufficient to deem it gambling.
That said - strictly speaking - if there is a positive expectancy then I think it is ok to call it investing.
Anyway - we won't get too bogged down in the exact semantics.

However one thing i don't agree with you is that short selling is gambling.

I don't fully understand how you can conclude this.

The way I see it is,as long as you have a strategy that has a positive expectancy (regardless of the market being up,down or sideways) then I would call it investing.
I don't see the relevance of which direction the market is going to produce this positive expectancy.
i.e. the direction of the market is irrelvant - what is relevant is the expectancy of the system utilised on the underlying market.

And if that system is a short selling system then so be it.
 
spreadbet said:
Spread bets do not pay you cash dividends, no matter how prices might be adjusted.
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Spreadbet - will have to dispute this...again.

spreadbetting compnaies indeed do pay dividends.

I have received them myself in the past.

this one isn't up for debate I'm afraid.

if for some odd reason your spreadbetting company does not pay dividends then I suggest you change spreadbetting company.
 
qwertyuiop said:
However one thing i don't agree with you is that short selling is gambling.
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Yep, we fundamentally disagree here. I believe in the equity risk premium. That is, the market prices an expected return on equities in excess of the risk free return, so as to compensate for the risk.

A short position in equities must pick up the negative mirror image of this. I can't accept that the person in the short position has an expected positive return as well as the person in the long position.

Your argument seems to be that one can develop strategies to exploit market anomalies which may involve short selling. Here I am extremely skeptical - my underlying premise is that you can't systematically "beat the market".
 
Harchibald said:
Yep, we fundamentally disagree here. I believe in the equity risk premium. That is, the market prices an expected return on equities in excess of the risk free return, so as to compensate for the risk.

A short position in equities must pick up the negative mirror image of this. I can't accept that the person in the short position has an expected positive return as well as the person in the long position.

Your argument seems to be that one can develop strategies to exploit market anomalies which may involve short selling. Here I am extremely skeptical - my underlying premise is that you can't systematically "beat the market".
Click to expand...

Ok - just to clarify this further a little, what you are saying is that people that continually go short will in the long run have a system with a negative expectancy due to the very nature of short selling?

Is that the crux of your argument?

If it is then either there is something which i do not understand or else what you are saying is untrue.

What is wrong with building a trading system around short sellling?
As long as you have your reasons to believe something will go down and have your usual rules of how much to risk, stop losses, no. of positions etc. I see no reason whatsoever why one cannot build a successful trading system in going short.

In fact - some hedge funds only go short.
(don't ask me to name them but I do recall on numerous occassions reading articles on hedge funds that only go short)

Or is our difference that I refer to trading systems and perhaps you are referring to long term buy and hold?
 
qwertyuiop said:
Ok - just to clarify this further a little, what you are saying is that people that continually go short will in the long run have a system with a negative expectancy due to the very nature of short selling?

Is that the crux of your argument?
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Yep, that's about it. I don't believe in alpha (the ability to systematically beat the market). I believe in the market. The market tries to reward long positions. A short position is a clear statement that you believe the market is wrong. The fact that one has a "trading strategy" which identifies times when one should short means you have a system for spotting market mistakes.

But that is the skeptic in me, clearly there are a lot of very highly paid people claiming to have alpha. I will grant one thing, if you believe that some managers can systematically outperform markets with long positions then I suppose one has to concede that this skill could also be applied to appropriate shorting strategies. But as I say I am extremely skeptical, a real believer in low cost passive index tracking.
 
Re: The difference between Investing and Gambling

Brendan said:
They will also tell you that they are all winning. All my friends who play poker on the net are winning. It strikes me as odd but there you go.
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Hi Brendan

I used to work for a bookies. A lot of my friends are regular gamblers who say they are up money. I asked them if I could check their balance (it was online gambling so I could see if their accounts were up or down money.) Without exception, every single one of my friends was down money, some of them down thousands.

The same bookies I used to work for closed all winning accounts. The assumption was they must have inside information (e.g. which horses have a cold or whatever) as it was not possible to repeatedly win long term. So if you're a gambler, and your account has not been closed, you are losing money...

Note I didn't deal with poker, but I would imagine the same delusions apply there.
 
If keyboard or a hedge fund has a system for spotting market pricing anomalies then of course there is no reason why these anomalies should not be a mixture of over and underpricing and if an overpricing is identified then of course a short position will have a positive expected return.

But if one has no reason to believe the market price is "wrong" then a long position has a positive expected return (vs risk free) and a short position has the mirror image negative expected return.

I have seen many surveys about whether managers or hedge funds can beat the market and I am very skeptical whether they can. Certainly lil' ol' me ain't goin' to find such a system, but maybe keyboard has, fair play to her, she should rapidly become a multi zillionaire.;)
 
qwertyuiop said:
I don't agree.

Explain that one to me.
Click to expand...

It's very simple, the expected return of a long position is positive over any timeframe you choose, i.e. the probability of the return on a long position being positive is > 50% over minutes, hours, days, weeks etc. etc.
 
zephyro said:
It's very simple, the expected return of a long position is positive over any timeframe you choose, i.e. the probability of the return on a long position being positive is > 50% over minutes, hours, days, weeks etc. etc.
Click to expand...

Right. That's where I diagree with you.
Without doubt, the shorter the timeframe the closer it is to random as to the outcome.
The timeframe is crucial. You ignore this fact.

In fact - someone can identify situations whereby the probability of something falling is > 50%.
This is done all the time by traders.

Thsi still doesn't takle away from the fact that over the long term that particular asset is more likely to rise than fall.
The point is that on its way it will have swings of up and down albeit with the primary trend being up.

Many traders take advantage of these temporary downswings to develop a system with positive expectancy whereby they shortsell.
 
So that explains it. Keyboard believes that the market is imperfect but more importantly that shrewdies can spot when it is wrong.

I am sure the market is imperfect but much less sure that anyone has a system for spotting these imperfections before they get corrected.

If keyboard has such a system that's a very nice spot to be in.

Getting a bit back on topic I don't know whether I have made the point before but the very obvious difference between sports betting and FSB is as follows. With sports betting the bookie can only win if his customers in aggregate lose. With FSB both the firm and its cutomers can both win, just as is the case with stockbrokers. In fact in bull markets a win/win situation would be the norm.
 
RTE Newscaster had to explain for the populace what "short selling" was. "Betting that a share price will fall" and he wasn't specifically referring to FSB. That about sums it up, no fancy talk about investment strategies in that definition.

Anyway glad to see the short sellers got toasted this morning.:D Anglo up 70% wow!! And my IN carpetbag about to pay off as well. Happy days are here again.
 
Harchibald said:
RTE Newscaster had to explain for the populace what "short selling" was. "Betting that a share price will fall" and he wasn't specifically referring to FSB. That about sums it up, no fancy talk about investment strategies in that definition.

Anyway glad to see the short sellers got toasted this morning.:D Anglo up 70% wow!! And my IN carpetbag about to pay off as well. Happy days are here again.
Click to expand...

But you can use the argument to say that going long means you are "Betting that a share price will rise"!! Just because I have the opinion that a share is overvalued doesn't make it any less valid or less of an investment strategy than a person who thinks it is undervalued. It's how markets work. There is nothing inherently wrong with short selling but I can understand why they are placing a temporary ban on it at the moment.
 
Sunny said:
But you can use the argument to say that going long means you are "Betting that a share price will rise"!! Just because I have the opinion that a share is overvalued doesn't make it any less valid or less of an investment strategy than a person who thinks it is undervalued. It's how markets work. There is nothing inherently wrong with short selling but I can understand why they are placing a temporary ban on it at the moment.
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My argument is that financial economics teaches that share prices in an efficient market have an inbuilt tendency to outperform risk free - the so called equity risk premium. However, I agree that short term long positions are little different to their opposite short positions and amount to betting that the price will rise by more than that inbuilt premium which is commonly cited as a mere 5% per annum. Short term traders are looking for 5% per day:eek:, and that has to be speculation/betting unless they have insider knowledge.
 
Hi everyone from this newbie.

Ended up here tonight instead of going to the pub which was on my mind too but I got too fascinated by this website.

I want to start a new thread shortly but after reading a lot of the spread betting threads I just want to add my two cents here.

I've been financial spread betting since about October 2009. I haven't been keeping proper records up to lately but I have lost money overall on it so far.

I have a small number of real shares too with an Irish Broker that I'm losing fairly substantially on as well. (from February 2009)

On the question in the opening post I think that financial spread betting and CFD's are nearly the same, but with a huge difference that hasn't been covered here and that is that CFD's look and act like 'Real' shares while Spread Bets look completely different but if you strip back the formatting behave exactly like CFD's and ordinary shares.

The differences are kind of psychological but the different format makes you think and act a lot differently. I still find it slightly confusing at times, but I have a spreadsheet done for myself where I can see clearly what I'm looking at in terms of equivalent number of shares and value as well as the leverage levels (or lack thereof ! ). And not get scared into acting against what I want to do.

I'm holding one losing position for well over a year and there is a financing cost of 2% per annum paid daily for rolling over which I don't think is probative. And the bet is completely open ended so I can wait for years for the position to recover.

My resources are rather limited and the minimum charges for regular share trading with my regular stock broker would make it completely uneconomical to do any buying or selling of normal shares.

I can however mimic real share trades with the spread betting without any transaction fees or costs other than the overnight financing costs.

So I can do a low level of trading which is both a hobby and I'm hoping to someday make a nice return from it.

And the real shares as well of course !
 
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