Is spread betting a form of gambling or investment? The answer seems to be, it depends where you place your bet.
Is Spread Betting Gambling or Investing?
Actually, it has been around for many years but it has become popular in financial trading during recent years due to greater accessibility to the financial markets. It was invented back in 1940 by Charles McNeil, a mathematics teacher from Connecticut when he became a bookmaker in Chicago.
Initially, this form of betting was applied to the outcome of sporting events. Indeed, betting on sports events is still very popular today.
The object of a spread bet is to predict the value of an outcome. It is a wager on the differential of an outcome rather than a straight win or lose situation. With sports betting the bookmaker will try to balance the books by attracting opposite bets on the spread. The bookmaker charges a commission on the bet so providing the bet spread is even they gain from the commission. The object is to bet on whether the outcome will be above or below the spread.
Within the UK financial markets, it is regulated by the Financial Conduct Authority. Within sports betting it is regulated by the UK Gambling Commission.
For gamblers, this form of betting has always been an attractive option. For Investors it is also an attractive option but the problem is the market decides the outcome. It is not whether one team is more likely to win by a set margin due to their track record and ability.
Spread Betting in the Financial Services Sector
Industry Regulators say that 82% of those who bet within the financial services sector lose.
In order to make an investment (or place a bet) it is necessary to make a CFD or contract for difference on an online trading platform. The CFD can be made speculating on an event which can be related to the rise or fall of shares, currency or any other commodity which is traded.
In gambling terms, the odds are very high but the wins are also high. You should be warned though that losses can be very high too if multiple losing wagers are made.
The Financial Conduct Authority are understandably concerned about this form of betting because traders use client money to make wagers. It all comes down to risk assessment, that is the risk in itself. You do not need to be a mathematician to understand that the financial markets are affected by the traders themselves.
The point here is whether the traders have track record and whether they understand what they are doing. Are they gambling or investing? That is the question, the answer may lie here. Between April and September 2016, the Financial Services Ombudsman received 79 complaints against spread betting trading platforms. Most of those complaints originated from traders who misunderstood the risks involved.
To be honest here, there is a greater need for qualification amongst traders. To gamble in a casino or place a sports bet you need to be of adult age. The same is true with betting in the financial markets but it should be more than that. Regulation is one thing but stupidity is another. Clearly traders are losing client money on a whim and that is just not acceptable. Greater controls are needed to educate traders of the risks involved.
I am asking myself what the difference is between gambling and investing in the world of spread betting? The two are similar in principle but there are some subtle differences. An investor probably would not place a bet with a bookmaker. People normally look up to an investor and down to a gambler. Investors sit at a desk all day and earn their living from it, or not as the case maybe.
The one commonality though is that both are probably acting on a whim.
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