Saturday, October 26, 2013

The "spread betting is gambling" fallacy

 

An article on spread betting in The Economist ("A Punt by Any Other Name") has got me thinking about  the people who raise their eyebrows with concern when I mention that I prefer to trade the markets using spread-betting. The common perception is that spread-betting is gambling - high risk-high reward and all that. Well it really defines how you define gambling. Here are some thoughts:
  • Spread-betting in fx, equities and commodities is simply a cheap and tax-efficient means of obtaining an exposure to markets that would be difficult to access with small-stake bets. The exposure is to the underlying asset, so it really is little different to buying shares etc directly. 
  • Okay, so you can amplify your bet size to the nth degree using leverage but how is this different to taking out a bank loan and gearing up a market position. 
  • If you are just having a flutter without understanding these clear risks then it may be a gamble for you as an individual, but you could be equally foolish in the underlying market if you wanted to.
  • The fact that you can win or lose doesn't make a it a gamble any more than taking any other risk-return decision, which is almost every decision we take in life, from crossing the road, to buying a product or service, to making a new friend, etc. Now, most of these have examples have a clear positive expected return and the argument could be made that most people lose in spread betting. However, most people also lose when trading the underlying markets, so this really is a separate issue on the efficiency of markets and the role of the active investor.
On another interesting note, here is a recent article by IG Index founder Stuart Wheeler where he highlights the key reason why the government doesn't impose capital gains tax on spread-betters:

"The fact is that spread betting is a boon to the Chancellor. Taken as a group, the punters will be wrong as often as right and, though dealing is nothing like as expensive as buying and selling shares through a stockbroker, the expenses will mean that the clients as a whole are losers. The point is that the losers cannot set those losses against their capital gains. Furthermore, the firms pay betting duty and corporation tax. And their now large number of employees pay PAYE etc."

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