Can Spread Betting Be an Ethical Way to Invest? Unpacking the Risks and Rewards
In the last few years, more people have chosen spread betting as a way to speculate in financial markets. It gives traders a way to earn from both rising and falling markets, without actually owning the stocks or currencies. Even so, spread betting is considered very risky and feels more like gambling than investing. As a result, people begin to wonder if the industry takes advantage of those who are vulnerable and what protections currently exist.
We discuss both the benefits and obstacles, look at how the industry is protected, examine links to problem gambling, look at whether the casino always has an advantage and review taxation. The intention is to examine spread betting carefully to understand if it can really be considered an ethical investment.
The Basics of Spread Betting
People who speculate with spread betting brokers can choose whether they think the price of an asset will increase or decrease. The spread is the variation in prices between the buying and selling prices of an instrument. Traders bet on point movement in the price rather than buying the underlying asset itself.
For example, if a spread betting firm quotes the FTSE 100 index at 7,542-7,543, an investor can bet £10 a point on whether the FTSE will rise or fall. If the FTSE closed up 50 points at 7,592, the trader would make £500 (50 x £10). However, if it closed down 90 points at 7,452, they would lose £900.
Whatever the outcome, it is magnified by the amount you have put at risk. It allows you to make significant gains, but losses can happen faster than your initial investments. Spread betting works well for those who like fast trading, but it’s dangerous for those who want to invest for the long run.
The Rewards of Spread Betting
Access to Financial Markets
Through spread betting, anyone has the opportunity to trade on changes in global financial markets. Traders are able to place bets on shares, indices, forex, cryptocurrencies and commodities using funds other than those needed to buy the assets themselves. The potential for big profits can be achieved with little money up front.
Shorting Opportunities
Spread betting makes it easy to profit from falling asset prices. Short selling involves borrowing and then selling assets in the hope of buying them back cheaper later to pocket the difference. With spread betting, traders simply bet on prices going down. The ability to hedge or speculate cheaply on declines provides valuable opportunities.
Tax Advantages
Spread betting profits are free from capital gains tax in the UK. The activity is classified as gambling, so profits are non-taxable. This gives spread betting an advantage over traditional securities investing, where capital gains tax applies. However, losses are not tax-deductible either, which can limit the appeal for less experienced traders.
Complex Strategies
Advanced spread bettors can utilise complex trading strategies to maximise profits. Techniques like hedging across correlated assets, trend tracking using moving averages, and range trading during consolidations can optimise returns. Automated algorithms can also exploit tiny price differentials across markets.
The Risks of Spread Betting
Loss Potential
The biggest risk with spread betting is the magnification of losses due to the high leverage. While profits can be large if markets move favourably, losses can also spiral out of control rapidly. Most traders lose money, and accounts can go negative to cover margin calls, forcing providers to close positions. Understanding risk management is vital.
Complexity
Spread betting has a steep learning curve. Traders must grasp technical and fundamental analysis, charting techniques, volatility concepts, hedging methods, risk management frameworks and emotional discipline. Without expertise, spread betting is essentially gambling, and the house usually wins long term.
Addiction Risks
The combination of volatility, high leverage, 24-hour markets, and rapid trading makes spread betting addictive. Problem gamblers can lose life-changing amounts quickly. The fact that losses are not tax-deductible exacerbates issues for those already financially stretched. Spread betting addiction requires treatment like any other dependency.
Industry Safeguards
Spread betting firms highlight risk warnings prominently on their sites and require client acceptance of significant disclaimers. They also adhere to strict capital adequacy, segregated client funds and transparency rules governed by the UK Financial Conduct Authority (FCA). Here are some key safeguards:
- Mandatory risk warnings. Explicit warnings highlight the percentage of client accounts that lose money.
- Affordability checks. Firms assess income, investment experience and risk tolerances through questionnaires.
- Restricted leverage. UK rules limit opening leverage to 30:1, reduced from 200:1 previously.
- Segregated funds. Client money is ringfenced in trust accounts, protected if the firm fails.
- Stop losses. Traders can preset automatic exit levels to close bets at loss limits.
- Cooling off periods. Firms allow cancellation within 14 days to enable reassessment.
- Problem gambling tools. Session limits, reality checks and self-exclusion options aim to identify issues early.
However, critics argue the protections and checks don’t go far enough. There are still many stories of people losing life-changing amounts due to spread betting. Others dispute whether adequate treatment options exist for those addicted.
Does the House Always Win?
Spread betting providers earn revenue by building in a spread between the buy and sell prices quoted rather than charging commissions. This means traders must overcome the spread just to break even. Scalping tiny profits is extremely difficult once the bid-offer spread and trading costs are factored in.
The spread allows providers to profit regardless of whether clients win or lose overall. Firms also tilt odds in their favour by restricting trading during volatile periods to protect against exposure to large moves against their books. These trading curbs have drawn criticism from clients claiming they are prevented from cutting losses at key times.
Some spread betting firms’ business models and marketing techniques have drawn comparisons with those of casino groups. Both industries rely on small percentages of customers losing large amounts to drive the majority of profits.
Taxation Differences
UK investors find spread betting attractive because it offers a tax benefit over traditional securities investments. As gambling is an activity, the profits are not taxed under capital gains rules. As a result, spread betting could save you tax compared to making short-term gains from shares or funds.
Some experts in trading taxation, though, point out that not everyone considers spread betting to be gambling. If someone keeps an investment for a month or more, say, the HMRC might classify it as an investment, not gambling. If you earn profits more than the annual capital gains allowance, higher-rate taxpayers must pay tax on those profits at a rate of 24%.
The broad interpretation from HMRC appears to be that carefully considered longer-term bets may move from gambling into investing territory in their view, as positions are held over time rather than traded rapidly. Any traders using computers to systematically profit or exhibiting controlled behaviours could also risk being taxed.
Losses are not tax-deductible either, unlike capital losses that can be offset against other investment gains. So the tax advantage only aids profitable traders. Those losing money pay an opportunity cost for the lost capital gains tax allowance elsewhere in their portfolio.
Ethical Considerations
The question of whether spread betting can ever be ethical elicits strong and polarised opinions. At its heart is whether the industry takes advantage of vulnerable individuals and if adequate protections are now in place.
Arguments Against:
- Deliberately targets problem gambling traits
- House always wins long run
- Addictive qualities cause life-changing losses
- Cryptic rules and trading curbs disadvantage clients
- Spreads and leverage are stacked against traders
- Small chance of long-term profitability
Arguments For:
- Traders take responsibility for managing their own risk
- Significant protections have been added in recent years
- Most traders do not lose dangerous amounts
- Monitoring improved for problem gambling
- Enables speculation on financial markets
- Profitable for a minority of skilled traders
What matters is to be realistic and keep control. An ethical firm would ensure that every new client is aware of the minuscule chances of making money consistently, according to the information traders have. If rules for spreads, trading bans, and examples of how leverage can cause quick losses are all clear, it becomes easier for users to decide.
Clear affordability warnings would deter those without sufficient income and capital. Ongoing monitoring would quickly identify problem gambling traits. Support mechanisms and self-exclusion processes would then help rather than hinder those losing control. Ethical spread betting requires clients to acknowledge that the odds are stacked against them, while firms recognise and respond to those struggling.
As app-based investing has become popular, regulators have to make sure they are helping everyone gain access while also protecting those at risk. If you handle spread betting correctly, you have great opportunities, but if not, it can be very risky. The ethical situation is still very carefully considered.
Conclusion
Overall, although spread betting offers chances to earn from both a rising and a falling market, it is very risky, and the odds are usually against those who trade as a retailer. Ethics are based on what people expect and how much control they want. People interested in trading should know that earning consistent profits in the long run is unlikely. Firms must provide reliable help for those clients who show signs of problem gambling.
With technology making it easier to invest, spread betting is expected to last. Yet, it is up to regulators to look after those in need without making personal responsibility too strict. Spread betting, in the end, should include a health warning. The theory of ethical investing is sound, but practically, most individuals are more likely to lose than to gain.