The recent decline in the FTSE 100 index from highs approximately nearing 6,000 in the middle of March to its present low position under the 5,300 mark heightened the anxiety of several investors. However there are certain strategies that traders can use to hedge their losses in their equities. The use of contracts for difference of commonly referred as CFDs as a short-term method, traders can substantially lessen their losses and possibly profit from falls. Coupled with proper attentiveness, CFD hedges can make a portfolio safer than it otherwise could be.
According to a senior market strategist Brenda Kelly of CMC Markets, the capacity to hedge an equity portfolio using an equity trade is one of the major benefits of CFDs. Furthermore, CFDs allow trading investors to place their bets on the trend of thousands of moving markets. Though relatively short-term and fast-paced it allow can allow gains or loses more than the preliminary investment.
In protecting position, the strategy need not be solely restricted to the ownership and concurrent trading of a single equity. One of the main appeals of CFDs is the diverse markets made available to traders. Kelly of CMC Markets further mentioned that many investors could own more than a share within the confines of the FTSE index thus a hedging strategy anticipated a short position on the FTSE index during episodes of low risk position can help to gain profits.
In both these situations, the key factor is to expect a short-term move. A hedging approach will only work if traders are confident that equity will shift in just one direction. CFD trades that are left overnight for instance will result in charges carried on the traders’ account. Traders seeking to hedge, should anticipate such broad changes. Similarly there will be some movements that will not turn out as anticipated; therefore it is very important to arrange a precise stop-loss order to thwart a possible hedge against loss from becoming a source of debt in itself.
There are grounds to use a CFD trade rather than a spread bet. Though compared similarly like parallel twins in many trading firms, the crucial distinction however falls down to tax and such charges will have a bearing on the trader’s hedging strategy.
The decision to either hedge or sell is highly dependent on traders’ initiative. However, CFD hedges certainly shouldn’t be used as an excused to prevent off-loading stock that has not enough long-term potential. A slightly crooked portfolio with hedges lined up against equities and risks founded under more risks probably are a good enough strategy to pull. With stock market trajectories looking less certain, it might be a good idea to start putting up portfolio walls a bit higher.