SINGAPORE, January 31, 2012 /PRNewswire/ --
While many investors will watch their shares devalue or quickly sell them during times of economic downturn, smart traders are protecting their portfolios by trading CFDs (Contracts for Difference). Here City Index Singapore explains how hedge your position or start short selling and offset losses through CFD trading.
In the past the only way to maintain a portfolio of shares through stock market downturn was either to take a short-term hit in value, or sell the shares before buying them back at a lower price in the future.
This would incur additional long-term losses from having to pay Capital Gains Tax (CGT) on your profits when you sell the shares. Also, the market may not fall as low as expected, making it even more costly to buy back the shares, while you would also have to pay more broker commissions for the additional trades.
One increasingly widespread way to ensure your portfolio isn't damaged by economic volatility is to hedge your positions by trading CFDs. A CFD, or Contract for Difference, is an agreement between two parties to exchange the difference between the opening price and closing price of a contract, and are often used for hedging investments.
CFDs can also be extremely tax efficient as, depending on your circumstances, you can use any losses you incur to offset against your Capital Gains Tax (CGT) liabilities. However, for more information it is recommended that you seek independent investment advice.
You can also use CFDs to offset losses in your portfolio by short selling. Imagine that you hold SG$5,000 worth of SingTel shares in your portfolio. You can short sell the equivalent of SG$,5,000 worth of SingTel shares through a CFD trade. Should SingTel share prices then fall by 5% in the underlying market, then the loss in value of your share portfolio would be offset by a gain in your short sell CFD trade. Conversely, a loss in your CFD trade would be cancelled out by an equivalent gain in your portfolio. This enables you to retain your portfolio throughout volatility without incurring any significant loss to its overall value.
There are many more benefits to dealing in Contracts for Difference from high leverage, which enables you to trade by paying just a small fraction of the total value of the contract, to not having to pay stamp duty, the ability to go long or go short and being able to trade across a wide range of markets.
Trading CFD and FX on margin carries a high level of risk, which may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits.
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.
City Index is a leading global provider of margined foreign exchange, CFD trading and in the UK, spread betting. As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. To learn more visit: http://www.cityindex.com.sg/
SOURCE City Index