Alternative Investor

Betting on the Bank of England

Interest rates have plunged to an all-time low as the Bank of England’s Monetary Policy Committee attempts to get the economy moving.
For many people this has meant good news with mortgage rates being forced down and those on tracker deals enjoying reduced monthly payments.
But savers have been feeling the effects with annual returns on investments greatly reduced.
So how can individuals best position themselves to benefit financially from any future interest rate movements?
Well, placing a spread bet on any potential forthcoming rises or reductions is just one way for smart investors to profit from the moves.
Financial spread betting traditionally works by speculators trying to predict future increases or falls across a variety of financial instruments from global indices or shares to currencies to commodities.
Spread betters usually ‘buy’ if they feel prices will rise above a spread company’s prediction, or ‘sell’ if they feel prices will fall below a firm’s quote.
However, spread betting on interest rates is unique in that it works in the opposite way.
For example, if you were looking to place a spread bet on interest rate movements with spread experts Spreadex, you would need to look at the company’s UK Short Sterling market.
Here, figures relate to a 100 point index and the quotes relate not to the Bank of England’s base rate but on the future prediction of Libor rates – the rate banks use when lending to each other.
Let’s say you see a quote of 98.46-98.50. This would represent a view that the future Libor rate will be between 1.5% and 1.54% (100-98.5 = 1.5 and 100-98.46 = 1.54).
So if you felt rates were going to drop to 1% you could choose to ‘buy’ on the price with a view on the level moving to 99.
But if you felt rates were going to rise to 2% you could opt to sell on the quote with a view on the level shifting to 98.
You spread bet by betting on each per 0.01 point movement. So, in each case above, if you had bet £10 per point movement you would have made either £500 (£10x50 points movement if the price moved from 98.5 to 99) or £460 (£10x46 points movement if the price moved from 98.46 to 98).
Obviously if you had got the trade wrong and the prices moved the other way, you would have lost money.
However, any losses can arguably be compensated for particularly if you were using this method of trading as a way to try and hedge against changes in monthly tracker mortgage payments.
For example, in the current market conditions, if one were to correctly forecast when rates were to ‘bottom out’ or to start rising again, they could offset any increase in their monthly payment.
In this case, if the individual made a winning ‘sell’ spread bet on the UK Short Sterling market (ie correctly predicting future Libor rates were going to rise) then any increase in the monthly payment would be compensated for by their winning spread bet.
However, if they got this wrong and rates did indeed continue to go lower then any loss in the spread bet would be compensated for by the resulting reduction in the monthly tracker mortgage payments.
All this may seem confusing at first glance and it is true that spread betting on interest rates has typically been an area only usually tackled by experienced or specialist traders.
However, more and more savvy speculators are being attracted to this area especially given the rate of reductions seen at the end of 2008 and the beginning of 2009.
Indeed, one Spreadex customer made more than £100,000 by correctly forecasting the Bank of England’s surprise 1.5% interest rate cut in November when the cut was reflected by a similar drop in the Libor rate.
Again, it should be remembered that the Bank of England’s base rate and the three month Libor rate can often be different figures.

How to be a succesful gambler Pt2

Accommodating Gambling Within Your Personal Life

Gambling successfully will inevitably have a considerable impact upon your personal life both in terms of time spent and in terms of financial resources.

It goes without saying that you should consult fully with any person in your life, who will be affected by your actions.

In order to gamble successfully you need to minimise external pressures.  It is a sad fact that many gamblers’ partners in life are unaware of the scale of their activity.

Gambling Styles

Our view is that you need to try gambling and analyse the effect it has upon you before you can be fully prepared to make the transition from a novice to a lifetime winner.
There are 5 gambling styles, in which you may find yourself participating. 
The Five Gambling Styles
* Professional
* Semi-professional
* Investor
* Entertainment
* Kamikaze

Professional

The gambling professional is focused solely on winning.  He/She is not in it for fun or for adrenalin surges. They carry out considerable research and operate a proven staking system in a disciplined manner in order to generate annual income, sufficient to meet their targets.

My lifetime friend and business partner Andrew Cork and I achieved an annual return of over £100,000 on a betting bank of £40,000 for 4 successive years before launching the Centaur business by adopting a professional approach to gambling

This method of gambling is the most successful.  However, it may not suit everyone’s psychological make up and requires an understanding life partner.

Semi-Professional Gambler

Typically someone who has a rewarding profession that they do not want to give up enjoys horseracing and has a winning mentality.

He/She will adopt a systematic approach to betting, which generates profit without involving the same degree of research, typically by specialising on a particular category of horseracing or sports betting.

This is perhaps the most realistic goal for most would be gamblers in that horseracing betting can become a very enjoyable and financially rewarding hobby.

Investor

The investor is someone whose betting is based on information from an advisory or tipping service. There are many racing advisory services or tipsters on the market but few provide a credible service.

Before joining any racing tipping service ensure that there is proven independent verification of their results by a public body and that this proof and detailed previous results are available for consideration before you join.
Centaur Racing Service results are independently verified and can be seen in full www.centaurglobal.com

Entertainment

Most people operate in this gambling style. Examples are:

* Going racing socially and having a £5 bet per race
* Having a flutter every Saturday on the horses, football or lottery.
* Watching a football match or golf tournament on television and betting on the outcome.

Entertainment gambling can be hugely enjoyable and can also result in profits. Thousands of people in the UK participate daily. Where people set themselves an annual, monthly or weekly budget for gambling, there is absolutely no problem with entertainment gambling and it can help to brighten up many otherwise dull and monotonous lifestyles.  A day at the races with friends can, in particular, be a highlight within the annual social calendar.

However, when entertainment gambling takes place without budgetary control, people’s financial stability can be put at risk particularly where the chasing your losses scenario begins to take effect.

So, my advice is to keep a record of your bets and returns so that you can accurately assess what gambling is costing or gaining you each month.

Kamikaze

As implied, the kamikaze punter is heading for a spectacular and early end to their gambling career.

Visit your local betting shop and you will see many people who fit this mode which involves an inability to leave the shop each day without putting their entire funds at risk.

As the day progresses they progressively increase their stakes in a desperate attempt to recover losses incurred.

Key Success Factors

Taking the plunge to gamble professionally involves putting significant funds at risk.  You should not take this step until you have developed the correct psychological approach.

The following acronym COLDER describes the key success factors you need to have in place to gamble successfully.

* Courage in your convictions
* Organisation
* Learn from your mistakes
* Discipline
* Effort
* Research

Full information on these principles is available on the Centaur Professional Gambling DVD.

This article is based upon a DVD published by Centaur Global Limited which covers the subject in greater depth. This DVD can be purchased for £29. Centaur also provides group and individual one to one seminars on professional gambling. Ring our client services team on 08717-121110 if you would like further information

Conclusion

In articles 1 and 2 I have covered the mental approach required to gamble successfully on horse racing. In the final article of this series I will show you how to get started using proven methods.
HOW TO BECOME A SUCCESSFUL GAMBLER

Spreadex Top 10 Positively Traded Equities 2008

With shares having taken a pounding during 2008, investors have been keen to identify firms which may buck the trend for the coming year.
And a good indication of where traders are putting their money comes in the form of the number of people ‘buying’ certain stocks in long-term spread bets.
Established spread betting company Spreadex – which enters its tenth year of trading in 2009 – has seen plenty of customers opening positions, speculating on where companies’ share prices will be over the next three months.
And a look at the top 10 most positively traded equities among the Spreadex spread betting clients shows the banks are clearly back in favour.
Here’s a run down of the top 10 stocks:

1. Royal Bank of Scotland
RBS shares started the year around £4, but had virtually halved in value by June as the effects of the credit crunch became apparent.
The turmoil increased in October as shares fell below 60p on news that banks were in funding talks with the Government.
At the end of November it was announced the Government had taken a 57.9% stake in the business and by the end of the year the share price closed at around 50p.

2. Barclays
At the end of February Barclays was trading at what would be a year high of over 510p but by July that price had halved.
Shares recovered slightly after July’s open offer, but by October the share price was tumbling below £2 as the banking system neared collapse.
The bank ended the year by shunning a government bailout, instead turning to the Middle East for help, with its shares at 153.40p at the turn of the year.

3. LloydsTSB
Throughout February, March and April Lloyds TSB shares were just below £5, touching a high of 488.50p.
However, by September shares had dropped to below £3 and not even the announcement that the group was in merger talks with HBOS could halt the decline.
The merger was given regulatory clearance at the end of October when shares briefly rose back up above £2, but they ended the year at 126p.

4. Halifax Bank of Scotland
HBOS began the year with shares above £7, hitting a high of 719.50p. But by June there were signs of trouble with the company announcing £1bn of writedowns before rumours of funding problems surfaced causing 50% of the value of the company to be wiped out.
The rumours were soon confirmed and Lloyds TSB stepped in with a merger leaving HBOS shares at 69p by the end of December – an incredible drop from 12 months earlier.

5. Rio Tinto
From £41.59 at the end of January, the mining firm saw its share price rise steadily for the first half of the year thanks to developments including Aluminum Corporation of China Ltd raising its stake in the company.
By May news of a possible takeover by BHP Billiton saw shares hit a high of £71.67 but when that deal failed to materialise, the effects of the global credit crunch and plummeting commodity prices sent shares below £40.00 by the end of September.
In December Rio Tinto announced it was slashing 14,000 jobs as shares ended the year at £14.90.

6. Soco International
Gas and oil firm Soco saw its share price hover around the £20 mark until the end of June, but July saw prices tumble below £14 following the plugging of a Vietnamese well and several broker downgrades. By October the price was at £11.11.
News of a potential buyer for the firm saw the price recover to above the £14 level but the share price continued to see-saw until the end of the year, finishing on £10.95.

7. Tesco
Tesco began the year with its share price around 442p. After occasional dips below the £4 mark, shares then broke that level in June.
Moves including Tesco taking full ownership of its finance arm from the Royal Bank of Scotland kept the share price just below the £4 level until October, when shares followed the rest of the market in plunging as the credit crunch took hold.
Plans to tighten spending saw a recovery in December when shares rose to 360p by the end of the year, well off its lows of 285.9p.

8. Mitchells & Butlers
Pubs had a tough time in 2008 with the effects of the smoking ban to contend with on top of everything else.
Mitchells & Butlers shares fell from a high of 489.5p at the start of the year to 175.5p in July.
The share price did rally after that, helped in part by Whitbread’s move to buy the firm’s Lodge Sites, but prices topped out around 338p and ended the year at 160p.

9. Severn Trent
Water company Severn Trent’s shares hovered just below the £15 level for the first half of the year – despite suffering a heavy fine from the sector regulators in April for falsifying data.
In October shares plummeted to just above £10 and then recovered before a warning over the rising cost of financing and a cancelled dividend sent prices down again. At the year’s end shares were at £11.98.

10. HSBC
HSBC was one of the banks to largely avoid massive writedowns caused by the effects of the credit crunch thanks to its investments in the Far East.
Its relative position of strength compared to its competitors saw shares hit a year high of 938p in October.
But the inevitable soon occurred with shares crashing towards the £6 level in November as the credit downturn hit Asian markets. In December, after admitting exposure to the Bernard Madoff fraud, shares closed the year on 662p.

Spread Betting part III

Andy McKenzie PR Manager of top UK spread betting company "Spreadex" gives us a deeper understanding of spread betting.

Scare stories over the state of the global economy and an impending recession means more people than ever are pulling their cash out of the volatile financial markets.
For some investors, it has meant switching funds from traditional stocks and shares into spread betting where money can be made on predicting the performance of equities, indices, currencies or commodities.
But if that still sounds like too much of a risk in the current economic climate, there is an alternative on the same theme – sports spread betting.
This adrenaline-fuelled form of sports gambling differs greatly to fixed odds betting in that a clever and accurate prediction of a scoreline or match outcome can result in big winnings.
However, similarly to financial spread betting, an inaccurate wager can result in losses much larger than your initial stake.
So how does sports spread betting work and what is the best way to approach this lesser known form of a flutter?
Prices are formed by a bookmaker who quotes a prediction or ‘spread’ of an outcome in a match or event.
For example, in football matches, instead of simply betting on a winning team or scoreline, quotes are released on outcomes such as the number of corners in a game, the number of yellow or red cards or even the aggregate total of the goalscorers’ shirt numbers.
In each case, if you think the prediction or ‘spread’ is too low you can buy on the price. Or if you think the ‘spread’ is too high you can sell on the price.
For every point away from the spread that you are correct, you will win that figure multiplied by your stake. Of course, if you are wrong you lose your stake times your margin of error.
So, for example, if Manchester United were playing Chelsea and a firm gave a Corner quote of 10.2-10.7 it would mean they expect between 10 and 11 corners to be won during the game.
Let’s say you make a £10 ‘sell’ on the price, as you predict a tight game with not many flag kicks. It would mean that for every corner below 10.2 you would make £10, but for every corner above 10.2 you would lose £10.
So if only six corners are won by both teams over 90 minutes you would make £42 (10.2 – 6 = 4.2 x 10), but if 13 corners are won by both teams in total you would lose £28 (10.2 – 13 = -2.8 x 10).
This example may show only relatively small winning or losing multiples, but if you imagine the volatility offered by Total Goal Minutes (the times in minutes of goals scored in a game added together) or Goalscorers’ Shirt Numbers, when the market can make up at anything from 0 to 400, then you can appreciate the thrill involved in this type of betting.
For example, in Portsmouth’s UEFA Cup group clash with AC Milan, one individual made a £10 Total Goal Minutes buy with spread betting firm Spreadex at a quote of 115-125 and made £1,840 when the market made up at 309 following late strikes from Ronaldinho and Inzaghi.
The added attraction of sports spread betting is that you can bet ‘in-running’ meaning that ‘spreads’ are constantly updated while the action takes place allowing you to close out for profits or to minimise losses during live play.
Also the sheer scale of markets to choose from means that even the most boring of events can be turned into an edge-of-the-seat thriller depending on your choice of bet.
Spreadex, for example, has more than 150 selections to choose from during ‘in-running’ football games as well as an extensive choice of markets covering cricket, horse racing, golf, rugby union, rugby league, tennis, snooker, motor racing, darts, greyhound racing, American Football and boxing.
Spreadex also offer a spread version of fixed odds betting known as ‘fixed odds’ spreads.
These work by offering a ‘spread’ based between 0 and 100 on a given outcome occurring, with the market either making up at 0 (if that outcome doesn’t occur) or 100 (if that outcome does occur).
So, for example, a price of 16-22 on Nicholas Anelka scoring the first match goal would basically represent the percentage chance of that happening.
A £1 buy at 22 would return £78 if Anelka did score the first goal (100-22 = 78), but would lose £22 if Anelka didn’t score the first goal (0-22 = -22).
As well as the two types of sports spread betting, Spreadex has the added advantage of offering financial spread betting from the same account.

For further information www.spreadex.com

How Do I ? - Spread Betting

Spread betting can be quite complex, our expert advisor Andrew Mackenzie from Spreadex explains what to be aware of when trading a spread betting account.

If you didn’t know your FTSE from your footy six months ago, you’ve no excuse now.
The escalation of the global financial crisis and the knock-on effects to the British economy mean that the crashing world markets are now regularly front page news in the UK.
And the undulating nature of indices such as the FTSE, the Dow Jones, the DAX and the Nikkei have arguably never seen so much attention.
This volatile situation – while a serious concern for those who have invested in traditional shares – is a spread better’s dream.

However, it is vital that trades are executed with care and with a strategy in place to avoid potential huge winnings turning into big losses.
The concept of spread betting is based on benefiting from the movements of global shares or world markets by either ‘buying’ or ‘selling’ an interest in those fluctuations (see previous article ‘The Shorts and Longs of Spread Betting’ for a full description of the workings of spread betting).
So for anyone with spread bets on the FTSE 100, the wild movements may often represent much more than just an indication of the share performance of Britain’s top 100 companies.

The beauty of spread betting as an investment tool is that – done well – traders can profit from movements up or down and, currently, winnings are tax free.
Investors can also take advantage of the low cost of entry with spread betting on indices starting from as little as a £1 stake per point movement.
But what is the best way to jump on the spread betting bandwagon?
Well, essential to the armoury of the spread better and the first thing to understand is the notion of ‘stops’ and ‘limits’ – procedures which allow traders to dictate market levels that they wish to either trigger profits or to control losses.
‘Stops’ give you confidence in your positions by ensuring that, if the markets were to move against your predictions, you can never lose more than a nominated amount or level.
The danger exists that sudden or overnight market drops or rises can cause levels to ‘gap through’ stop orders resulting in losses larger than accounted for.
These can be avoided by ‘guaranteeing’ your stops.
Traditionally ‘guaranteeing’ stops has incurred a premium or charge from companies who would have to take the loss on your behalf should the market move suddenly.
However, the introduction of completely free – and also mandatory – guaranteed stops from new spread betting firm ShortsandLongs.com has redefined the rules of spread betting, making it potentially more attractive as an investment tool.
‘Limits’ act in the opposite way to stops and work by closing out your trades for a nominated level of profit should the market reach a certain point.
The idea of ‘limiting your winnings’ may sound strange to some. But the idea is that traders will usually have a hunch that markets may rally to a certain level before dropping, so will nominate their predicted market high as the point to take their profits before a slump.
They are also particularly useful for people who aren’t able to monitor their bets throughout the day in order to manually close out certain positions at required levels.
So how do ‘stops’ and ‘limits’ work in practice?

Well, let’s say you had been looking to make a short-term spread bet on the FTSE 100 on Friday, October 24.
With GDP figures due to be announced later in the day and with the expectation being that figures would show a contraction of the ecomony, you decide to ‘sell’ at a quote of 3879 for a stake size of £2 per point movement just after the opening at 8am.
You set your ‘stop’ at 3940 meaning your trade would be closed should the FTSE rise to that level meaning you would lose £122 in a worst case scenario (3940 - 3879 = 61 x 2 = £122).
You choose not to place a ‘limit’ instead deciding to monitor the FTSE after the GDP figures are announced.
After placing your bet the FTSE rises close to your ‘stop’ reaching 3,937 at about 9am before falling.
The index then plunges downwards as speculation mounts over the potential negative impact of the expected GDP figures.
At 10am the FTSE is at 3,850 and then drops further hitting 3,720 before rising slightly to 3,729 at 11am.
You decide to keep your trade open with the belief that the FTSE will fall further. Instead the index rises to 3,812 by noon and you close out your bet for a profit of £134 (3,879 - 3,812 = 67 x 2 = 134).
The above scenario shows how placing ‘stops’ or ‘limits’ at different levels can affect your profits or losses.
For example if you had set your initial ‘stop’ at 3,920 you would have been closed out for a loss of £82 (3920 - 3,879 = 41 x 2 = 82) missing out on your potential profit.
But also, if you had closed out at 3,720 you would have made £318 (3,879 - 3,720 = 159 x 2 = 318).
Of course if you had set a larger or smaller stake size winnings or losses would have been multiplied. Also the fluctuations through the morning show how bets would have been affected by the movements should they have been placed at different times.

The above example represents a bet over a very short time period and, of course, spread betting can be used as investment over a much longer term.
But even so it highlights the thrill and excitement offered by this fast-growing form of trading – where the same possibilities of profits and losses exist in betting on the movement in a variety of markets from oil or gold to currencies or bonds.

LINKS
www.spreadex.com

Andrew MacKenzie worked for eight years as a journalist covering news, business and sport across a variety of titles including The Sunday Times, The Telegraph, The Mail on Sunday and The Daily Mail online. He has been PR Manager at Spreadex since November 2007

The Shorts & Longs of Spread Betting

Spread betting can seem complicated at first glance, Andrew MacKenzie of UK spreadbetting company Spreadex explains what spread betting is and how to take best advantage.
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With the effects of the credit crunch beginning to bite on households and businesses, more people than ever are looking for new ways of investing their hard-earned cash.
That’s why spread betting – although having been around for many years – is currently experiencing a boom in popularity.

At the turn of the millennium there were only a handful of financial spread betting providers.
But now there are more than 20 companies to choose from all offering variations on the traditional theme with established high street banks, brokers and bookmakers all launching their own platforms.
So why the growth and sudden surge of interest in this particular sector and how exactly does spread betting work?

To the uninitiated the concept may initially appear daunting, but the basic principle of trading by ‘buying’ or ‘selling’ an interest in the price movement of global shares or the world markets remains relatively simple.
Spread betting firms offer a prediction or ‘spread’ of where they think a particular share or index will close at a given time, allowing individuals to trade or bet on the accuracy of that estimation.
People who think a prediction may be too low can ‘buy’ on the price whereas those who think the spread is too high can ‘sell’.
If your hunch is proved right there exists the opportunity to make quick money on volatile market movements. The downside, however, is that if your trade goes against you, you can lose many times your original stake size.

For example, let’s say Tesco opened the day at 357.75p and you want to speculate on the movement of the shares in the short term.
* You see a daily rolling quote of 351.4-352.4p from one firm and decide to buy at £100 per penny movement at 352.4p.
* Let’s say Tesco ends the day up at 360p, against the firm’s expectations, then you would win £760 (360-352.4 = 7.6x100 = 760).
* However if Tesco ended the day down at 350 you would lose £240 (350-352.4 = -2.4 x 100 = -240).

The attraction to investors from spread betting is that access to the markets is much quicker and simpler than traditional stock market trading and that the leverage provided by many firms opens up access to large bets this is a particular advantage in the current climate where credit is difficult to secure.
You can also profit from market movements downwards as well as upwards and any money you do make from spread betting is currently free from capital gains tax or stamp duty.

The FSA’s recent ban on the short selling of certain banking and insurance stocks has temporarily limited the ability to sell on a selection of shares, but spread betting firms still offer the opportunity of buying and selling on the performance of hundreds of FTSE 350 and AIM listed companies.

To highlight the access provided by spread betting, referring to the above Tesco example again, betting £100 per penny movement would be the monetary equivalent of buying 10,000 shares as each penny movement in the share price can win or lose you £100.
With a stockbroker you would need to put up £35,240 to purchase the stock, but with spread betting firms you only have to make an initial deposit, most commonly called the Notional Trading Requirement.
For example, spread betting firm Spreadex offer 3% NTR on selected stocks to certain customers.
So to facilitate the above trade you would only need to have £1,057.20 in your account.
However, if market movements went against you, you would be required to make variable margin payments to maintain your position.
The principle of buying and selling on price fluctuations means you can spread bet on a variety of products and markets from commodities such as gold or oil to interest rate levels, currency exchange or even house prices.
This means smart investors can ‘hedge’ against everyday activities such as purchasing foreign currency to travel abroad.

Let’s say you are planning to go to America on a family holiday in a few months time, but that the pound is in a strong position against the dollar.
You think that Sterling cannot possibly hold the position until you go but you don’t want to tie up your cash by purchasing the currency early.
You see a spread of 1.7984-1.7992 on a contract which is due to expire just before your trip and sell at £4 per 0.0001 movement.
Your hunch is proved correct and a few weeks later the dollar strengthens against the pound and the firm puts out a new spread of 1.7842-1.7850.
You close out the bet by buying at the new price of 1.7850 and make a profit of £536 (1.7984 - 1.7850 = 0.0134 x 4 = 0.0536).
Of course, if Sterling had risen against the dollar, against your expectations, and had expired at 1.8008 you would have lost £96 (1.7984 - 1.8008 = 0.0024 x 4 = 0.0096).

The services provided by the different spread betting firms give you varying degrees of control over your spread betting portfolio allowing you to open and close trades at set levels and also to place stops to limit your losses.
For example, ShortsandLongs.com (one of the newest providers on the market) offers mandatory free guaranteed stops on every trade you place.
This means that although you can lose more than your initial stake, you can never lose more than the amount of money in your account.
This safety net is ideal for new investors as it provides genuine reassurance against the fear of huge losses should their spread bets go wrong.

LINKS
www.spreadex.com
www.shortsandlongs.com

Andrew MacKenzie worked for eight years as a journalist covering news, business and sport across a variety of titles including The Sunday Times, The Telegraph, The Mail on Sunday and The Daily Mail online. He has been PR Manager at Spreadex since November 2007

Gambling Vs Stock Market

Centaur Global Chairman Keith Sobey gives us his experience of the difference between the stock market and the gambling markets and finds that they have more in common than most people choose to see.

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My objective in writing this article is to try to get the thousands of dyed in the wool stock market investors who will read it to sit back and think objectively.

Let me start by declaring an interest. As the chairman of the largest Sports Risk Fund in Europe, my personal view and Centaur’s business premise is that gambling in the sports betting market or on horse racing is no different whatsoever from trading in stocks and shares. Both involve placing funds in a market where there are winners and losers. The key to success is primarily the skill of the analysts involved.

For most of my adult life I worked in finance at a senior level. I saw how the stock market was viewed by my peers as the Holy Grail for investment while people who gambled were whispered about by management and viewed as having a stained character. The Ealing film makers of the 1960s must take a proportion of the blame for this as generations of cinemagoers grew up seeing the gambler or punter  stereotyped as a rat faced individual continually on the run from his bookmaker who typically drove around in a Jaguar smoking a fat cigar.

I experienced this prejudice personally in the late 1980s when I was Deputy Director of Finance in a rural local authority. I was approached by the Chief Executive after a Council Meeting and was told that one of the Councillors had seen me collecting a large sum of money in one of the town’s betting shops and that I should know better than to put myself in such a position. I replied that I thought that the Chief Executive and some of the other chief officers had put £1,000 each into a shares investment club only to be told that was completely different. I leave it to you to decide how I felt when the shares club was bankrupted after Black Monday in the same week that I bought my first BMW with my profits from gambling.

Things have changed dramatically in the twenty first century. Most people have got used to having a gamble on the lottery and football fans and golfers have become regular participators in their sports betting markets using their knowledge of the sports. Meanwhile the pedestal on which the financial markets had been placed has become decidedly shaky after the initial decade following the pension miss-selling scandals in the early years of the century and more recently the blatant misfeasance involved at a senior level in many major financial organisations caught up in sub-prime.

Even the editor of the Investor’s Chronicle, one of the biggest supporters of the City, commented earlier this year when comparing gambling with investing on the stock market “In one activity you are likely to be seduced into action by well spoken and immaculately dressed spivs, in the other you are likely to bet on horse racing!” 

Enough said about changing views within society let us analyse the difference between the key features of the two markets.

Comparison Between Key Benefits Of The Stock Market and Gambling Market

                                               

Benefit	Stock Market	Gambling Market
Expert   help available	Yes	Yes
D.I.Y   option	Yes	Yes
Accountability	?	?
Tax Free   Profits	No	Yes
Vulnerable   to terrorism	Yes	No
Vulnerable   to geographical disasters	Yes	No
Control   over funds	Low	High

I defy any truly impartial reader to conclude, after considering the above, other than that the Gambling Market is a more favourable market to operate in for the intelligent participant. Yes you can argue that investors in the stock market operate within a market regulated by the Financial Services Authority. However, the Government have also addressed the issue of regulation in the gambling market via the formation of the Gambling Commission in 2006.

I have also not yet played my trump card; the launch of betting exchanges into the gambling market in 2001.

Betting exchanges first became part of the gambling market in 2001. They have subsequently revolutionised that market by giving traders;

* More competitive prices than bookmakers (average 20% better)
* Opportunity for the first time to back NOT to win as well as to win eg in a 15 runner horse race you can oppose 1 horse and have the other 14 running for you.
* Opportunity to trade in running during sporting events.
* Opportunity to practice minimal risk arbitrage trading

Today over £7 billion per annum is traded on sporting events on the largest betting exchange Betfair, a sevenfold increase since its first trading year in 2001/2. Staggeringly, since the exchanges became part of the sports betting market, the number of winning participants in the gambling market has increased by over 500%.

In conclusion, today’s gambling market offers tremendous opportunities for intelligent and disciplined individuals. However, before you all rush off and have £500 on the first favourite at Sandown there are a number of lessons that you need to learn. Over the next few months I hope to unlock the door to many of the most important lessons for readers with the articles on the following subjects:

* All You Need To Know About Betting Exchanges
* The Psychology of Gambling
* The Poker Phenomenon
* Staking to Win
* How to Race Read
* Know the odds
* Becoming a successful racehorse owner

In the meantime if you would like to learn more quickly and thoroughly why not take advantage of our readers offers below.


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Psychology of Gambling (DVD)	£95	£35	£60
Staking   to Win (DVD)	£75	£25	£50
Race Reading (DVD)	£95	£35	£60
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Investment, Speculation, and Gambling

 What exactly are the definitions of the terms "Investment & Speculation" and how can investors differentiate the two? Despite the diligent efforts of some of the stock markets greatest minds, there are no universally accepted definitions. Some securities are referred to as speculative despite the fact that logically, they can be viewed as investments. Additionally, investors frequently buy and sell securities like treasury bonds (that are considered safe investments by most) with entirely speculative motives. Adding to the confusion is the fact that in both the short and long run, investors frequently lose money while speculators frequently make money.

 One of the most thorough discussions of "speculation" appeared in a 1993 issue of the Journal of Portfolio Management and was written by Martin Fridson

Fridson divided the definitions of speculation into four categories. The definitions either implied the use of or involved (1) price changes, (2) quick profits, (3) high risk, or (4) some combination all three elements.

There are any number of  scenarios that present interesting questions.

Is an investor that buys a government bond in search of a short term gain (from dropping interest rates) investing or speculating?

Most of the worldwide Government bonds (Treasury Bills, Bonds and Notes) are considered "risk-free" and certainly are not considered speculative securities by most. Yet these securities are used frequently to speculate on the direction of interest rates.

The majority of individual venture capital investments result in complete losses. However, venture funds typically yield higher returns than stocks because one or more of the funds' investments commonly yield many times the initial investment (thus more than making up for complete losses of other investments). Is an allocation to a venture capital transaction an investment or speculation?

Speculation - "the assumption of considerable business risk in obtaining commensurate gain."

Commensurate Gain - "a positive expected profit beyond the risk-free alternative. This is the risk premium."

Considerable Risk - "the risk is sufficient to affect the decision."

Gamble - "to bet or wager on an uncertain outcome."

 In their textbook “Investments”, by Zvi Bodie, Alex Kane, and Alan J. Marcus they argue that the primary difference between speculation and gambling (as defined above) is "commensurate gain."
They reason that "a gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favourable risk-return trade-off.
To turn a gamble into a speculative prospect requires an adequate risk premium for compensation to risk-averse investors for the risks that they bear. Hence risk aversion and speculation are not inconsistent."

Bodie, Kane and Marcus are not the first to compare the stock market to gambling. Analogies and metaphors comparing investments with casino games and other games of chance are commonly used on Wall Street.

Humans of course, have a long history of engaging in and developing addictions for gambling. According to Peter Bernstein, the earliest form of gambling may date back to 3500 BC when a kind of dice game called astragali was played.

In his book ‘Against the Gods’, Peter Bernstein discussed gambling in the context of risk. Bernstein traced the history of numbers, probability theory, and the development of people's perception about risk and gambling. According to Bernstein, "Human beings have always been infatuated with gambling because it puts us head-to-head against the fates, with no holds barred. We enter this daunting battle because we are convinced that we have a powerful ally: Lady Luck will interpose herself between us and the fates (or the odds) to bring victory to our side."

At a time when casino's, lotteries, and sports betting are hugely popular, it's easy to understand why people might confuse speculation with investment. Mega resort Casinos have sprouted all over the world and the demand seems to be never ending.

 Israel was divided among seven tribes by lot. Christ's robe was given to a lottery winner so it would not have to be cut. The Sistine chapel and its paintings were supported by lotteries. The Italian lottery has been running continuously since 1530. Lotteries are played in over 100 countries, and yet people often do not associate a lottery with gambling.

Perhaps our experiences with lotteries can shed some additional light on humans' obsession with risk. Millions of people are willing to stand in lines for hours just to buy a lottery ticket with worse than "one-in-a-million" odds and yet the same people would not place the same amount of money on one horse out of ten in a race.
The odds of picking all six numbers in a 6/49 lottery are roughly one in fourteen million and the odds of winning a thunderball lottery are roughly one in eighty million, but again, ask the lottery ticket buyer to place there currency on a single number of a roulette table and they would probably refuse.

Perhaps it is the fact that the stock market and other investments generally rise over the long term, that draws speculators to investment markets. As Markowitz points out, stocks in general are a positive-sum game since they rise in the long term. But, while an investor purchasing a stock has a positive expected return, his or her expected return relative to the market is zero (before costs).

Because investors have the option of investing in index funds, the returns from a specific market (or asset class) and any individual security can be separated. This issue goes to the heart of the passive vs active management decision.

Let's say an investor measures his performance against the Fortune 500. If he chooses to overweight or underweight a stock relative to its composition in the index, is this an investment decision is it speculation or is it gambling?

Similar questions can be asked of other investors relative to their benchmarks . The answers of course, depend on your definitions.

Regardless of how you define the terms, its likely to be a worthwhile activity to estimate your expected returns on both an absolute basis as well as relative to an appropriate benchmark. And if you find yourself enjoying the activity of investing or if you find yourself addicted to the speed and excitement of the trading game, perhaps you should seriously consider whether you've crossed the line between investing and speculation and maybe you are really gambling with your money.

 

Quotes

"A prospect that has a zero risk premium is called a fair game. Investors that are risk-averse reject investment portfolios that are fair games or worse."
Zvi Bodie, Alex Kane, and Alan J. Marcus in Investments

 "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little."
Fred Schwed Jr. in Where Are The Customer’s Yachts?

 "Games of chance must be distinguished from games in which skill makes a difference. The principles that work in roulette, dice, and slot machines are identical, but they explain only part of what is involved in poker, betting on the horses, and backgammon. With one group of games the outcome is determined by fate; with the other group, choice comes into play. The odds--the probability of winning--are all you need to know for betting in a game of chance, but you need far more information to predict who will win and who will lose when the outcome depends on skill as well as luck. There are cardplayers and racetrack bettors who are genuine professionals, but no one makes a successful profession out of dice or roulette.
Peter Bernstein in Against the Gods