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How to use CFDs to hedge your portfolio

by , 13 January 2014

You may believe that trading financial instruments like contracts for difference (CFDs) is all about trying to make a quick profit. But there is more to trading CFDs than that. You can actually use CFDs to hedge your investment portfolio. By using CFDs to hedge your portfolio, you can use them to act like a kind of insurance. Let's take a closer look at using CFDs to hedge your investment portfolio…

This are many advantages of trading contracts for difference (CFDs), the research team at FSP Invest in The Ultimate Contracts for Difference Guide explain…

These include the low costs of trading CFDs and the fact that there is no expiry dates on them.

But there is also another advantage for trading CFDs. And that’s hedging your current portfolio.

By trading CFDs you can hedge the short-term value of shares you already hold without having to sell your actual shares. This can be particularly useful if you plan to hold these shares for the long-term.

Let’s say you hold 200 shares in Platinum ABC Company. You think that the share is going to fall over the short-term as platinum is lagging.

How hedging works with CFDs

Platinum ABC Company is currently trading at R185.

So, to offset any chance of loss to your portfolio, you short (sell) 200 CFD contracts in Platinum ABC Company.

The margin required for your Platinum ABC Company short trade is R3,700. This is the equivalent of buying an equal amount of shares with the idea that they will perform in the opposite direction of the underlying asset.

By doing this, you’re hedging your bets and will come out even and definitely not worse off, at the end of the day. This acts as a type of insurance for your portfolio.

By using CFDs you can actually protect your portfolio by using CFDs to hedge your positions in shares you own.

So there you have it, how to hedge your portfolio by using CFDs.

How to use CFDs to hedge your portfolio
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