I thought I would write a few words about spread betting as a follow on to my article on Penny Shares, "Invest don't gamble". I would like to quote the work of Tom Murcko, CEO, InvestorGuide.com
"Gamble: To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance." http://www.investorguide.com/gambling-vs-investing.cgi
"Invest: To put money to use, by purchase or expenditure, in something offering profitable returns." http://www.investorguide.com/gambling-vs-investing.cgi
Tom Murcko the writer of the articles writes "... the distinction isn't clear. In investing, are you not betting on an uncertain outcome? Are you not taking a risk in the hope of gaining an advantage or benefit? In gambling, are you not committing money? Are you not doing it in order to gain a financial return?"
Another source I have studied says "spread betting with a proper system is not gambling. It's just another method of trading, whereby you can bet literally pennies." With spreadbetting you can also make money from shares going down as well as up, which you cannot do with ordinary shares. In this economic climate and with a bit of knowledge it is not hard for people to identify companies likely to lose value and make a bit of money from that.
The mechanisms of a spreadbet account can allow you to place your bet when shares rise or drop to a certain price, and that your bet is only activated if this happens, and based on whether that result happens your wager can be programmed for an expected share price to drop further or rise higher when that point is reached.
So for example Royal Bank of Scotland is trading at 70p, you can programme a bet, that should the price reach 75p, you believe the price will climb higher, or conversely you could programme a bet that should the shares drop to 65p you believe the price in your opinion will drop even lower. However if you lose the bet, you lose your money, and the greater the variation between your predicted outcome and the actual outcome the greater your loss, and you won't even have any shares left to show for it to sell on a future occaision if they rise. There are sophisticated mechanisms within spreadbetting accounts to allow bets to follow the market for more than a day or even months. So savvy traders can make an easy tax free income from this (as betting attracts no tax). Similar to the trade plan example I gave in my Halifax share dealing article, spreadbetters can limit their potential loss and profits, by terminating the bet if it starts going the wrong way.
Is spread betting bad? I wonder if it takes some of the volatility out of the normal market place, instead of people causing fluctuations in share prices by unpredictable buying and selling of real shares, or whether it encourages volatility, because people out there can literally make money from share prices going down?
However as Tom Murcko states "you can change the world in a small way by investing in companies you believe in, such as socially or environmentally conscious firms and mutual funds, or biotech companies that are working on diseases that might affect you or someone close to you."
I think it is bad that there is no encouragement from the government to do the right thing, as you can bet and make tax free profits from gambling but not from investing in the economy, and why gamble on penny share investments going up, when you can invest money in spreadbetting systems, betting on companies to collapse in the credit crunch and make money from it?
PLEASE SEE READERS COMMENTS - THIS IS HIGH RISK AND I AM NOT ADVOCATING SPREAD BETTING IN ANYWAY
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Interesting - if I was comfortable with the mathematics of probability, I'd probably understand it better. Meantime, I'll stick to the tried and tested "a fair day's pay for a fair day's work".
llbcollins 05.11.2008 23:17
brereton66 summary below is almost correct, that you lose money for each point so should you bet on a share to rise at £5 a point, but it falls, then you pay £5 per point it falls, or win £5 per a point it rises, and conversely you bet on a share to fall, you lose money for each point it rises. Though there are sophisticated means within spreadbetting accounts for limiting how much profit and liability you will take / risk, so for example you can bet on a share to rise, but only bet upto it rising 1 point, and limit your liability (normally 10% of the share value is the minimum liability) ... so someone could reasonably predict that if RBS goes to 70p it will go to 71p (win £5), however it reaches 70p but then drops to 68p, you lose the difference between 68p and your prediction of 71p, 3 points x £5. IT IS NOT TO BE TRIED LIGHTLY
Nov 4th, 2008
(Nov 5th, 2008)
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