Is Financial Spread Betting Gambling?
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 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.
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.
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?
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.