By Arend Jan Kamp
Editor at IEX.NL
A couple of months ago, I had interesting discussion with IG, a international broker in special products. They had something new. In the weekend all markets are closed, except for a few markets in the Middle East. Of course these stockmarkets have a (historical) correlation with the big western indices, like the American Dow Jones, the British FTSE 100 and the German DAX 30. IG constructed a synthetic Dow Jones, FTSE 100 and DAX 30 on Sunday and you can buy special products, contracts for difference (CFD’s), to trade them.
“It’s investing”, IG said to me.
“No, to trade with synthetic products on synthetic quotes is anything but investing,” I said. “It’s gambling.”
Who’s right? According to the law, both of us. Because there is no law for what to call investing, trading, speculating or gambling on the financial markets. Believe me, there are differences, big differences! To my opinion this is what we are talking about:
- Investing: mostly buy and hold for the long term. Like pensionfunds does or Warren Buffett to give it a famous face and name. Dividends and coupons make in the long term your investments grow, far more than price action!
- Trading: to use statistics, economic data and past experiences to invest on the short or the midterm with a certain degree of the possible outcome too make money out of expected price action. It’s an art, not science!
- Speculating: same as for trading, but more focus on special occasions and less predictable outcome like political turmoil, natural disasters et cetera
- Gambling: no more, no less, just to hope that the market goes up or down!
The exact definitions may differ, but every professional in the market will agree these differences and especially the risks! Investing in the long term has less risk, the others comes with a lot of risks. Risk, reward and costs is the pure basic of whatever you do on the financial markets!
The problem is the main media has no idea about this – for them it’s all investing – and so does the public. Well, I wish you good luck to collect a pension by – my words! – gambling with synthetic products on synthetic quotes on Sunday, to give an example! It´s my fear that after the dotcomhype in 2000 another generation of new investors will go broke, because they have no idea what they are doing and what the risks are.
I think the industry has a responsibility to inform and teach the public. Joe Sixpack has to keep out of trading or speculating, because he will never ever make money out of it! All research is clear about this. Why not definitions or warning signs on products, like trading, gambling or investing? That easy to come to term for the industry. Main Problem is that shot term gambling, speculating an trading with whatever is much more profitable – costs and spreads – for them than long term investing.
I said: Joe Sixpack has to keep out of trading or speculating. Not gambling. No more fun than to gamble on the stock-, commodity- or currency- (FX) market! As long as you know that you’re gambling and not investing for your pension. The difference is crystal clear. Like gambling on sports games, play poker, lotteries et cetera you always hope that you’re right and make some money. Whatever they do, investing, trading or speculating, professionals on the financials markets have only but one wisdom:
To hope is to sell!