LONDON, January 19, 2012 /PRNewswire/ --
Instead of watching your shares devalue, you can hedge your positions through CFD trading. By dealing in Contracts For Difference, you can short sell the equivalent of your shares to offset the loss in value of your share portfolio with a gain. Here City Index explains how to protect your shares with 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.
"It's the classic ice cream van example," says Joshua Raymond, City Index Chief Market Strategist. "If you invest into an ice cream van, then you are likely to make the most money in the summer, when the weather is warm and sunny. In the winter, when it's cold and wet, consumers are unlikely to want to buy ice creams, so sales are likely to be down."
"A typical hedge against this would be to invest in an umbrella company. That way, when it rains, any losses made in the ice cream van are likely to be offset by the umbrella manufacturer."
Josh CFD seminar
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 £5,000 worth of Vodafone shares in your portfolio. You can short sell the equivalent of £5,000 worth of Vodafone shares through a CFD trade. Should Vodafone 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.
Protect your investments by hedging or short selling and sign up for a CFD trading account at City Index at: http://www.cityindex.co.uk/cfd-trading/start-trading-cfds.aspx
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.
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.co.uk/)
SOURCE City Index