At first glance, the term ‘spread betting’ would imply a level of risk tantamount to gambling, rather than the typically more measured trading. But, in the UK at least, spread betting is regulated by the Financial Conduct Authority as a trading activity, rather than the Gambling Commission, clearly showing there may be more to financial spread betting than first meets the eye.
The term ‘gambling’ denotes taking a punt, taking a risk on an outcome that is determined by substantial elements of chance. While there might well be one horse that’s faster than all the rest, it may have an off-day, or it might not feel right ten minutes before it races – these are factors you cannot predict, factors you cannot control and factors to which you surrender your destiny when gambling on a horse.
The fact is, financial spread betting is unlike gambling in a variety of distinct ways. When betting on a sporting outcome, the best you can do is analyse past form and look at any other factors which might impact on performance on the day – ultimately, there’s no way of knowing whether your team, being the most likely to win, will go out a concede four goals in the first five minutes, in spite of all your best judgements and analysis. With financial spread betting however, the level of analysis and judgement that can be exercised is far greater, a more akin to that of ‘regular’ trading.
How Does Spread Betting Differ From Gambling?
Financial spread betting is betting on markets. Markets don’t have off-days, nor are their outcomes random. A market can be forecast on the basis of external factors, such as economic data and current affairs, and patterns can be identified to indicate likely movements. Markets are consistent, and reflect the attitudes and behaviours of ordinary traders. By getting into the mindset of the trader and how he might react to certain other variables, it becomes possible to stake against much more predictable outcomes. While that doesn’t necessarily guarantee more success, the benefits of being informed in your decisions afforded by spread betting make it a preferable option for the serious trader.
The markets are considerably different. A company publishes reports and information which directly affect its performance, and the markets respond in kind. While some investors do take large risks on a hope and a prayer, the majority would consider themselves to be adopting a more skilled approach to making their money, more closely aligned to the discipline of other financial traders rather than gamblers. Bear in mind that professional traders and funds also use spread betting as an investment vehicle.
That said, spread betting does require the trader to place a stake against the movements of the relevant markets, which is used to determine liability and profit on a per point basis, and traders don’t in fact acquire any asset or instrument in the process. So why would traders turn to spread betting in the first place, and why would they bother to take the time to learn the ins and outs of spread trading and later learn from your mistakes?
The answer lies in the potential upside gains and the benefits of leveraged trading. By its very nature, spread betting leverages every position such that slight incremental movements can increase the winnings by double, treble or more. However, as with other forms of trading there are downside risks involved, which can be potentially significant for the trader that takes his eye of the ball.
Spread betting is completely different from gambling, and although both involve placing an initial stake, financial spread betting is a totally different ball game. While the levels of risk in spread betting can far outweigh those with traditional gambling (and are not limited to the initial stake), the degree of control afforded to traders is significantly deeper, allowing more informed decision-making and more predictable outcomes. For this reason, many traders prefer the term ‘spread trading’ as a more accurate reflection of the practice.
Don’t Gamble: Spread Betting and Trading
Spread betting might be taxed as a gambling activity, but that doesn’t mean you should treat it like one. The difference between trading and gambling is quite significant, and it is an important one to bear in mind for the would-be successful trader. While the urges towards pushing the boundaries and going for that larger win are the same, the rules of engagement need to be totally different if you are to expect different results.
Bear in mind that the gambling industry generates multiple billions every single year, which is made up almost exclusively from the difference between the winnings paid out to gamblers and the stakes paid in to the bookmaker or casino – hardly a ringing endorsement of gambling as a way to make money.
Likewise, when it comes to trading the markets some will gamble and take decisions that just ‘feel’ right, sometimes even with very little or no research to back them up. It could be jumping in to an unknown position, backing up more heavily than you should behind a 50/50 position or just taking a wild stab in the dark. While you might hit it lucky and actually win that particular trade, the moment you start taking uninformed gambles over researched, logical positions is the moment that your trading career is in trouble.
The Difference Between Gambling And Trading
The main difference between gambling and trading is manifest in the risk each strategy poses. A gambler knowingly takes on risk and is prepared to stake his money on a chance outcome. For example, FTSE100 might finish up on the day in 62 days time, or it might be down on February 22nd at 3.22pm, but without thorough and detailed research there’s no valid reason that you should be taking this risk. OK, you might be rewarded with long odds from a bookmaker, but the chances are that a decision like this could easily go one way or the other. Worse still, if you don’t know what you’re talking about you could be backing an extremely unlikely result. Ignorance can and will cost you money.
Trading on the other hand is a much more reasoned and logical practice. You’re not staking money and crossing your fingers – the idea with sensible spread trading is to research the markets, and gain an understanding of the factors that come to bear on their movements in either direction. This process of researching your markets helps stack the odds more so in your favour, and helps reduce your exposure to risk down to the bear minimum.
How to Know When You’re Gambling
The difference between gambling and spread betting lies almost squarely in method. When spread betting, there are broadly three decisions you can take, each requiring its own justification. Firstly, to open a position – ask yourself the reasons why a position will make you money before you enter it. If the logic is weak, or doesn’t have any rationale underpinning it, you’re probably taking a gamble and an unnecessary risk. Secondly, you can close a position – could this position run on and make you more money, or has it peaked? Don’t just close out on a whim or because you get nervous – base your decision solely on the data. Thirdly, you can do nothing – again this needs its own justification. Are you doing nothing because you can’t think what else to do, or is there a valid reason for holding on to your position?
If you find yourself unable to link up a thought process in your decision making, you’re almost certainly taking a gamble that could work against you. The more gambles you take, the greater chance there is of a large, damaging failure. Make sure you’re trading on reason and on the strength of your research work for best effect.