Sunday, October 29, 2006

Who's going to take credit for gamblers' losses?

Allowing speculators to buy stocks on credit is dangerous

Andrew P K Yap
news@newstoday.com.sg

THERE was a recent report in Today to the effect that brokers will soon be tapping into the Credit Bureau's services.

This calls for some hard questions. Why, in the first place, are brokers allowed to give credit to speculators?

In contrast, the recent Casino Control Bill clearly states that casino operators cannot extend credit to their clients and even ATMs are not allowed on the casino premises. The stock and shares market is a platform for investing in companies. You buy equities and in return for placing your money, expect to be rewarded with a share of the company's profits. Over the years, you expect the companies that you have invested in to grow in size.

In theory, there should be no urgency to invest and one should buy stocks only after accumulating funds to do so. That is what investment is about.

But the stock market is also about speculation. You buy stocks and shares in the hope of profiting from the price movement. As the prices can change by the minute, buyers hope to make a killing almost immediately.

This is a bit like gambling.

When you invest, you study the fundamentals of a company and its valuation.

On the other hand, when you gamble, you simply try to discover which stocks are hot at any given moment. Sure, you may use charting techniques and technical analysis, but it is really a bit like reading tea leaves. You may occasionally get it right but there is no "scientific" reason for that.

The differences between the two types of people who frequent the stock market are clear. The investor is not in a hurry to buy or sell and works in a timeframe that is usually in the vicinity of a decade. The gambler or speculator, in contrast, is always in a hurry. He could be looking at a timeframe in terms of minutes.

If you think about it, credit facilities are more likely to be snapped up by speculators who may not even have time to transfer funds to their stock market accounts.

The question is: Who benefits if credit facilities are provided for what is essentially gambling in the guise of investing?

It is certainly in the interest of the markets as the gamblers provide liquidity. It is also in the interest of brokers, since their earnings are based on commissions generated by speculators who buy and sell numerous times in a short period. But it is most certainly not in the interest of the gamblers, who may have to put up with devastating consequences.

Pathological gambling is recognised by the American Psychiatric Association as a bona fide mental disorder and included it in its Diagnostic and Statistical Manual (DSM-lll).

No matter how strong their faith in their own lucky stars, gamblers inevitably end up losers as their luck will run out sooner or later.

The question is whether brokers should be allowed to induce their customers to gamble excessively — even offering them credit — only to sue them eventually to recover their monies.

The writer is an IT consultant who used to work as a commodity futures broker.

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