Hedging Using CFDs

CFD trading offers a very lucrative financial investment tool that enables both the parties involved to gain significantly. CFD is the acronym for contract for difference and is a contract between the buyer and seller that stipulates certain conditions according to which, the seller is liable to pay the difference in value of the underlying…

CFD trading offers a very lucrative financial investment tool that enables both the parties involved to gain significantly. CFD is the acronym for contract for difference and is a contract between the buyer and seller that stipulates certain conditions according to which, the seller is liable to pay the difference in value of the underlying asset in question, to the buyer, at the time of the contract. If the value is negative, then the difference is paid by the buyer to the seller, instead of the other way. CFD's are financial derivatives that enable investors to take a position and reap the benefits of prices when they move up or down.

Let us understand the concept of hedging. Hedging is an effective investment tool that aims at eliminating or eliminating the risks involved in another form of investment. For example, if a trader owns 1000 shares of a company, he would be able to hedge the risks through CFDs by aiming to short sell 1000 shares CFDs to account for the risk exposure for that particular investment in equity. Prior to CFDs becoming a rage, the only way to reduce risk exposure was by using options. The limit of option is that it allows only multiple of 1000; therefore, if one has invested in 2760 shares, he will be able to hedge for 2000 or 3000, using options. Hedging using CFD, on the other hand, allows for 1 to 1 hedging to account for the risk in equity investments completely.

Another important aspect of hedging using CFD is that if you opt for a short position, the CFD broker would be liable to pay you on a daily basis for the short position. Another great way to hedge against your portfolio is to use the CFD index. For example, if you own $ 100,000 investment in Australian stocks as per ASX top 200, instead of hedging for every stock individually, you may opt to hedge using the ASX top 200 index. The benefits of hedging, using the index is that the brokerage implied is mostly waived off and the CFD margin are to the tune of 1% only. This essentially means that in order to protect your investment worth $ 100,000, you need to invest only $ 1000. Yet another effective means of hedging is, by partially hedging gold stocks. The process may be a bit complicated for the uninitiated; This, however, is a very effective tool to protect an investment. For example, if you own $ 25,000 worth of gold CFDs for long, and the gold prices plummet after 4 PM, you may then, as an alternative to waiting for the market to recover, hedge the $ 25000 by short selling gold CFDs overnight. CFD Trading is negotiation with inherent risks, and an investor would always do well to guard against uncertain periods.

Using short CFDs to hedge your investments is a good way to protect the portfolio since share prices are volatile and they may move radically up or down, depending on the various market conditions prevalent at that time. Very often, an investor may hold a long term position for a particular equity, but in the short term, the stock may become flat or even plummet. In such an eventuality, a prudent investor would do well to enter into an equal number of CFDs to account for the risks involved. This opposition force will balance the negative forces that may erode the investment. CFD trading is therefore, an intelligent and effective way to counter the risks involved in the volatile capital markets