It is not likely that a scam could last for more than 35 years, involve such a large number of people, and be regulated by FSA. Nevertheless, some people make negative comments about spread betting, raising doubts on the behaviour of some spread betting companies.

Financial spread betting started in 1974 with the creation of the “Investor’s Gold Index” and it is estimated that there are more than 1 million spread betters in the UK. The activity is subject to the Financial Services Authority (FSA) strict regulations as any other type of trading in the UK. Some providers are also exposed to further scrutiny because they are public traded companies, as is the case of IG Index and Capital Spreads.

Let’s take a closer look into the arguments often raised by scam theorists and try to understand and disentangle them.

1. Spread betting has no pricing transparency and carries high transaction costs

The argument: “When you buy and sell, you’re not really dealing with the market but rather with a counterparty – the spread betting firm. The product you’re trading is just an over-the-counter contract made between you and the provider. You will receive take-it-or-leave-it price offers from the firm, resulting in higher spreads and lower liquidity.”

It’s true that you’re not trading the market directly and that you pay higher spreads. But zero commissions means more transparent prices and for most trades the spread is lower than commission fees faced elsewhere. It’s true that you may find yourself in the uncomfortable position of depending on your provider when you want to close a position but taking into account the huge competition that comes not only from the UK nowadays, it wouldn’t make sense for any reputable firm to risk annoying its clients for the sake of a few spread points.

1. Spread betting firms want you to lose, because the more you lose the more they gain.

The argument: “Any profit you make means a loss for the firm, incentivising them to make it as difficult as possible for you to make a profit by skewing spreads or even suspending momentarily the market when you want to close a position.”

The idea that your profit is your provider’s loss is not correct. Most providers cover their books in the market (at least partially). So the money they lose to winning clients is won back through their hedging trades in the stock markets.

It is very hard and costly to find new clients, and clients are not interested in losing money recurrently. Earning money directly from client losses would not be a smart route to follow. Spread betting providers benefit more from getting low and consistent commissions from happy clients than from clients who lose their initial deposit very quickly.

1. The name says it all. It’s betting.

The argument: “Spread Betting is a form of gambling, and cannot be considered as investing. Bets on a spread are just like bets in a casino!”

The name financial spread betting is not a fortunate one. The word “betting” is automatically connected with gambling. Although gambling is a legitimate recreational activity, we know that gamblers generally lose in the long run. Also, spread betting is often associated with sports spread betting which in turn associates it with gambling again.

In spread betting you bet on price movements like you do on any derivative contract like share options, for example. “Betting” is an inappropriate and unfortunate name. Spread betting is regulated by the FSA and not by the Gambling Commission. Unlike gambling, research can give you a profitable edge.

1. Most people lose money

The argument: “It is said that only 1 in 5 spread betters end up a winner. The odds are greatly in favour of the spread betting provider.”

While it is true that only about 20% of spread betters are long term winners, studies have shown that a similar percentage of traders in more conventional financial markets lose money. So this is not something that applies just to spread betting.

So why do most traders lose money? What most novice traders need to understand is that you can’t expect to master trading when you start out – just like you can’t expect to master dentistry or sports or anything else in a week. You must take the time to learn the intricacies of the markets you trade in, and do some fundamental research and technical analysis. It’s a time-consuming activity. A large number of people open accounts with low starting account balances, gearing their positions to unthinkable levels with very high likelihood of resulting in bank ruin. Many of these beginners are naive and don’t really know how financial markets work. They often assume positions based on nothing more than gut feeling. As the expression goes – “if you fail to prepare then you should prepare to fail”.

1. There are many negative comments in forums and other pages on the internet

The argument: “Some internet posters report difficulties in selling positions, suspect price spikes, stop order slippage, price re-quotes, and many more problems.”

Some may be true, but remember one important thing. One unsatisfied client can make a lot of noise, whereas satisfied clients usually tend to keep quiet. Comments you may find may be skewed and exaggerated. While it is difficult to comment on individual cases without knowing the full details, it should be known that it is in the interests of the spread betting firms to treat their clients fairly and to make sure that they stay with them over the long run.

1. Trading systems don’t work

The argument: “There are many trading systems based on technical analysis selling for huge prices and claiming huge profits but they don’t work.”

Trading systems are not sold or provided by spread betting companies but rather by external sources. Those systems don’t work and you will end spending your money and time. If the systems were really good, why would they sell it instead of profiting themselves from such a great strategy? Most trading systems are scams, looking for people who are desperate for profits. You will have to read books and maybe attend some seminars to build your own system. Any shortcut will lead you nowhere.

As a final comment, I must say that financial spread betting is an excellent way to trade the markets but one that needs a high degree of knowledge and dedication. Most people take shortcuts and end up losing money – contributing to a high percentage of losers. This results in disgruntled people making negative comments about financial spread betting and scaring newcomers. The problem is very often with the traders themselves and not because of an underlying problem with spread betting.

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