Finance
Internet Capital Sourcing Model Gives Hope to Small Businesses
The controversial financial model ‘crowdfunding’ looks set to change the field for small business, social enterprise and even the arts
Merging Interests
Ambitious graduates hoping to enter into the complex world of high finance tend to aim for a few very prestigious roles depending on their characters
Occupy The Future
What should be the next step in the strive to bring democracy to the world financial system?
What is your prefered work model?
Education
Macroeducation: The Real Value of University
Students of the future will need to change their thinking when it comes to higher education. University is about much more than increasing earning potential
Copy/Paste Your Way Through College
Has the Internet made written assignments useless and is there a better way to assess understanding?
Main Content
Financial Spread Betting
“When I was young, people called me a gambler. As the scale of my operations increased I became known as a speculator. Now I am called a banker. But I have been doing the same thing all the time”.- Sir Ernest Cassel, private banker to King Edward VII
The nature of gambling has changed drastically in recent years. No longer does the punter have to walk into smoke-filled bookmaker to place bets on outcomes of sporting events. With the advent and ubiquity of the internet, the punter no longer even needs to physically place bets; it is all done electronically, at the click of a mouse. Naturally, the array and sheer number of events on which a bet can be placed has increased exponentially at the same time. In recent times, financial spread betting has become an increasingly popular form of attempting to make money by predicting the future. But can it be considered gambling? What are the benefits and the pitfalls of financial spread betting to the customer?
Spread betting as a concept is probably best explained with an example. Let’s take a football match. If the market offered in a football match relates to the number of yellow cards the bookmaker believes will be shown in the match, a typical indication might be 5-6. In this case, 5 is the “bid price” while 6 is “the offer” price. If you believe there will be more than 6 yellow cards shown, you buy at the higher price and correspondingly, you buy at the bid price, i.e.5, if you believe there will be less than 5 shown. If there are 8 cards shown in the match, and you have bought at the higher price for example, 10 euro “per point”, your profit is 20 euro (10 stake x (8-6).
Spread betting began in the 1970s. It is difficult to put an exact figure on the growth it has experienced or on the number of people currently involved in financial spread betting. Figures from within the industry reveal that a London-based operator, Capital Spreads, saw the number of trades per day it was involved in shoot from under 17,000 in 2008 to 27,000 in August 2009. While in the early years of spread betting it was gold and currency exchange with which punters were preoccupied, the major market now is financial spread betting.
There is no doubt that financial spread betting is more closely associated with buying shares and stock market activity than gambling in a traditional sense. The fundamental idea behind it is that markets are “played” without the customer ever taking ownership of the target of the transaction. For this reason, financial spread betting involves speculating on the direction any financial instrument will take in the future. Such targets of transactions include shares and currencies. Part of the appeal of spread betting to traders is that it gives them an opportunity to dodge the old adage that the only things certain in life are death and taxes: profits from financial spread betting do not incur capital gains tax, unlike trading shares on the stock exchange.
The major disadvantage to spread betting is that, unlike in traditional betting, you could conceivably lose far more than the stake you place. In our football match example, if no yellow cards are shown and you have gambled there will be more than 6, then you lose 10 euro for each card that you missed out on in your prediction. While this might not seem like a vast amount of money, consider that if what you have invested in was shares rather than a football match, and the share price collapses...
For this reason, in the UK for example, the FSA (Financial Regulator for the UK) has reported on the need to ensure the risks of spread betting are clearly understandable to the customer, namely that "[the most important risk is]…..the risk of incurring a loss greater than their (the customer’s) original stake”. Despite this major pitfall, the popularity of spread betting is ever-increasing. After all, the doomsday scenario of losing huge sums of money on the whim of the markets has a flipside; huge sums of money can, in theory, be won just as easily. Will every trader make their fortune from spread betting? Don’t bet on it…