How Cfd Trading Can Help You Hedge

CFD trading is a strategy which is especially useful in hedging

. Hedging is a strategy employed to minimise the risk of loss due to price change. Towards this end a position is a taken in the futures market which is opposite to the one adopted in the physical market. In the event of a fall in the price of the shares, the loss is in the cash market position is balanced by profit in the futures position.

What Is A CFD?

Contracts For Difference are just that. It is an agreement between a buyer and a seller which states that the seller will pay the buyer the difference in the current value of the asset involved and its value at closing time. If the price difference falls to negative, then the buyer must pay the seller the difference. In terms of share trading it means a contract between an investor and a broker to exchange the difference between the opening prices and the closing prices of shares multiplied by the number of shares agreed upon.

CFD Trading Works Like This: A buyer studies his options to determine whether the price on a share will increase or decrease and invests accordingly. The investor adopts a long position if they think the price will rise or a short position if they think it will go down. The profit or loss depends on the right understanding of the price change. If you go short on the correct shares you profit even if the price falls. A short position means you sell stock that you don't own and purchase it again when the price falls.

In a word, Contracts for Difference are financial derivatives that allow investors to profit on both price increase and price decrease for a share through market speculation.

In CFD trading you do not have access to the shares themselves. You only profit or lose through their price performance. So if you go long you get dividends but never actually hold the share physically.

How Can This Strategy Be Used For Hedging

Investors realise that share prices move both up and down and often unpredictably. Now if you want to secure yourself against future share price change then you 'Hedge' to protect yourself. You could hedge using CFDs, that is, you can adopt as many long positions as short for the same share. This way, whichever direction the share price takes there will be neither profit nor loss.

There are many advantages to this kind of hedging. Integration comes at the top of the list. CFD trading is integrated with the Trading Platform, so there is no margin additionally required when you purchase shares in your prime facility. Secondly you get to earn interest on all your short positions for the duration they are held.

These CFD trading agreements come with no limitations. They have no expiry date; therefore you can hedge for whatever period you like. Also they do not need to be in a minimum quantity or need a strike price adherence since they are Direct Market Access.

by: Leslie West

POST COMMENT

Taking Advantage Of Cfd Trading How To Hedge Using Cfd Trading Ivybot Is Another Wonder For Foreign Trading Etf Trend Trading: How To Consistently Beat The Pants Of The S&p Average Every Day Does the Triad Trading Formula Function? Scalp Trading For A Prop Trading Firm Trading Coach Advice - Simplify Your Trading Swing Trading - An Unnoticed Reliable Strategy Small Cap Stocks The Stealth Greek Of Options Trading: Vega What You Should Know About Insider Trading Parcel Delivery Available to Assist When Trading with Sri Lanka Benefits Of Trading In Nifty Option