Is Financial Spreadbetting a Form of Gambling?

Right from the beginning, trying to predict the way a stock or market will move has been described as stock speculation. There should be no doubt as to the fact that if you are going to trade the markets, then you have to speculate on the movement of the market. Traditionally you had to come up with all the money required to buy or short a stock, for instance if you wanted to buy 200 shares of Barclays Bank at 500p per share you had to deposit £1000 in you share account. In some cases your broker could let you trade on margin, in which case you would have to deposit half the amount (in this case £500) and could buy the other half on margin. However, times have changed and the financial markets have introduced various types of derivatives and instruments that enable people to trade without putting down the entire deposit. Spreadbetting is one of such instruments.

The first step to answering the question in the title is to define the words gambling and speculation. Gambling is defined in the dictionary as; to play at any game of chance for money or other stakes; to stake or risk money, or anything of value, on the outcome of something involving chance; a venture in a game of chance for stakes, esp. for high stakes. Speculation on the other hand is defined as; engagement in business transactions involving considerable risk but offering the chance of large gains, esp. trading in commodities, stocks, etc., in the hope of profit from changes in the market price; a conclusion or opinion reached by such contemplation: From the above definitions you can see that both words have similar meaning. Both involve predicting the outcome of an event. However, if we shift away from the definitions in the dictionary, while gambling is synonymous to taking an uneducated guess, speculation is synonymous to taking an educated and calculated guess. While the odds are against a gambler, the odds are in favour of the speculator. According to Dickson G Watts in his book Speculation as a Fine Art, “Speculation is a venture based upon calculation. Gambling is a venture without calculation. The law makes this distinction, it sustains speculation and condemns gambling.

In his biography, Reminiscences of a Stock Operator, Jesse Livermore, a legendary stock speculator said of his early days as a speculator “Yet, I can see now that my main trouble was my failure to grasp the vital difference between stock gambling and stock speculation”. Another relevant quote from his book is “Since suckers always lose money when they gamble in stocks – they never really speculate”.

Let’s get back to the question, Is spreadbetting gambling? Our focus is financial spreadbetting. Quotes are based on the actual price in the market, e.g., if I want to buy 100 shares of Vodafone, and the price in the market is 177-177.8, the quote given by the spreadbet company has to reflect the current price of Vodafone. If the price of Vodafone goes up, I make a profit irrespective of the strategy I used. On the other hand, if the price of Vodafone drops, I lose money irrespective of the strategy that I used. Taking the above into consideration, it is not the strategy of buying the shares, but the way I arrived at the decision to buy that makes it a gamble or speculation.

First and foremost, you must always trade with a plan. Plan your trade and trade your plan. If you trade without a plan, then that is gambling not speculation. For example, I leave home in the morning without any intention of buying or selling a share, however during lunch I notice that Sainsbury’s has risen 5% today. I then decide to buy 100 shares of Sainsbury anticipating that it will still rise further. My action will be classified as a gamble rather than speculation. Such acts if done consistently would lead to loses in the long run.

Also, if I continually violate my methods, for instance buying when the slope of the moving averaging is falling, or if I repeat the same mistakes time and time again, then I am tending towards gambling rather than speculation.

To conclude, if it is not used intelligently spreadbetting does carry a higher risk than tradition methods and you can loss more than your initial investment, the high level of risk does not make it a gambling tool. It requires a different type of risk and money management compared to traditional ways, it’s suited for different styles of trading. If you think that because it’s got betting embedded in it’s name, then don’t speculate on the markets through any means.