How Financial Traders use CFDs to Hedge Share Portfolios

Sep 10, 2011, 04:00 ET from City Index

LONDON, September 10, 2011 /PRNewswire/ --

CFD trading numbers increased from 18,000 to 25,000 in 2010 - a rise of 40%, with a further 9,000 traders expected to enter the CFD market this year.

Joshua Raymond, Chief Market Strategist of City Index (http://www.cityindex.co.uk/), believes one of the reasons for the growth in CFD trading is hedging: "While many use CFDs to speculate on where the prices of shares, indices, currencies and commodities will go, one of the most favoured factors behind the popularity of CFDs is that they give UK stock investors an efficient tool to hedge against the risk they hold in their share portfolio."

"By using CFDs to hedge against an existing share position that you may hold, you can protect your overall profits or losses from deteriorating if you feel that share prices may be set for a fall."

A recent CFD trading hedge example

Imagine a Barclays shareholder notes the recent fall in Barclays shares at the start of August, and decides to hedge his exposure in Barclays shares until the economic uncertainty subsides. For the purposes of this example, let us say Barclays shares are currently trading at 190p.

The investor holds 5,000 shares, which at 190p are currently valued at £9,500. In view of this the investor short sells the equivalent of 5,000 shares in a Barclays CFD trade at 189.50 (accounting for the market bid/offer spread).

If share prices were to fall, the investor would make an almost equivalent profit in his hedged CFD position minus the costs incurred in opening the CFD position.

Mr. Raymond summarises: "[Hedging] is indeed one reason why CFDs have become more and more popular over the last recession - and even more so with August's heavy equity falls."

"A further advantage of using CFD trading to hedge is that you can offset any losses against Capital Gains Tax if they are made in a direct hedge against an existing share position that you hold physically. To understand more about the tax advantages of hedging using CFDs, please seek independent tax advice."

Open your CFD trading account with 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.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, spread betting.

We constantly look to improve the performance of our platforms and expand our range of services. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Learn more about CFD trading at http://www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx

 


SOURCE City Index