Objections to spread betting revisited

Objections to financial spread betting abound for various reasons. While it is not up to me to convince anyone about the potential benefits of financial spread betting, it is nonetheless useful to provide unbiased, independent information for those who might hold certain misconceptions about this innovative approach to short term trading.

Objection / Misconception #1—spread betting is gambling and, by its nature, is different from conventional trading:

For many active traders who have conventional stockbroking or even cfd accounts, perhaps the most important objections to using spread betting is based on the mistaken view that spread bets being ‘bets’ are somehow less ethical than conventional share trading or cfds. This psychological barrier stems from the use of the word ’bet’ in spread betting.

In my view, this is just plain wrong!

Like cfds, traded options or futures, spread bets are essentially derivatives. Their underlying value is tied to the core instrument that they track.

In my humble opinion, for the overwhelming majority of active traders, the instrument of choice ought to be spread bets. Yes, you do not get dividends as you would if you were an investor in the underlying shares for instance, but then again, if you are a short term/active trader, dividends income would be the last thing on your mind anyway.

When you consider the potential advantages such as the fact that spread betting is free of capital gains tax, you wonder why people harbour such potentially costly misconceptions.

Misconception #2—when you spread bet, you are betting against the brokers who are out to get you!

Conspiracy theories about spread betting companies have existed since the introduction of spread betting itself! For some reason, many people believe that brokers make the bulk of their money from taking the opposite side of trades carried out by clients. The truth is that brokers simply balance out their books through matching client trades and hedging in the markets, thus eliminating most, if not all, net directional exposure.

The bulk of profits that the brokers make come from the spread. Remember that the spread is the gap between the price at which you buy and that at which you sell the instrument (such as a share or index or currency pair).

The logical extension of this realisation then, is that brokers would derive the most benefit if their clients increased total volume and frequency of transactions.

It follows therefore, that rather than try to “rip you off and take all your money” as some claim, it actually makes a lot of sense for the spread betting brokers to help you succeed, or at least to have your money last as long as possible to ensure that you can trade with them for long. This objection, like many others, is in my opinion, baseless.

This is exactly the rationale behind the move by many spread betting firms towards providing extensive educational facilities for their clients. Client education range from materials covering the basics of spread betting, introductory courses on technical analysis and courses aimed at enhancing clients’ understanding of market fundamentals.

I hope that this article would at least cause you to re-examine your objections or misgivings about financial spread betting.

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