LONDON, October 22, 2011 /PRNewswire/ --
It can be risky for traders to put all of their eggs in one basket - particularly in the current, volatile market climate. For this reason, many investors choose to diversify their risk by trading across a range of asset classes and sectors - a technique often referred to as 'hedging'. Joshua Raymond of City Index (http://www.cityindex.co.uk/) explains how hedging works:
"A good example of hedging is the price of the US dollar and dollar denominated commodities," states Chief Market Strategist Mr. Raymond. "There has been a fairy strong inverse correlation between the price of crude oil, copper and other dollar-denominated commodities to the price of the US dollar index. This is because the more expensive the dollar is, the more costly it becomes for non-holders of dollars to buy these commodities, and vice versa."
"Therefore, should you have a large long position in, say, crude oil, it can be hedged effectively by going long US dollars, as any fall in crude is likely to be picked up by dollar gains."
CFD Trading as a Hedging Tool
Traders can use CFD trading as a cost-effective alternative to traditional hedging. For example, if an investor possesses £5,000 of Vodafone shares and suspects that the share price might decline over the coming months, they might sell their shares and then repurchase them once the value has fallen. As a consequence, however, they would have to pay stamp duty, two lots of dealing commission and potentially capital gains tax.
In contrast, if the same investor was to turn to CFD trading as a hedging tool, they could protect their position by short selling the equivalent of £5,000 Vodafone shares on a CFD trade. Should Vodafone share prices then fall by 5% in the underlying market, the loss in value of their share portfolio would be offset by a gain in their short sell CFD trade. Many investors today use CFDs to hedge their portfolio, especially in volatile markets.
City Index offers a range of risk management tools to help traders limit their spread betting and CFD trading losses. Learn more about risk management in spread betting at:
Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
About City Index:
Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.
As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, spread betting.
We constantly look to improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer service and support. Visit http://www.cityindex.co.uk/ for more information.
SOURCE City Index