PRN: Australian Traders Hedging and Short Selling with CFD Trading
Australian Traders Hedging and Short Selling with CFD Trading [08-February-2012] LONDON, February 8, 2012 /PRNewswire/ -- Australian investors are offsetting their losses through hedging their share portfolio through CFD trading.
Australian Traders Hedging and Short Selling with CFD Trading
LONDON, February 8, 2012 /PRNewswire/ --
Australian investors are offsetting their losses through hedging their share portfolio through CFD trading. If economic volatility is damaging the value of your shares, dealing in Contracts For Difference, gives you the opportunity to short sell the equivalent of your shares to offset the loss in value of your portfolio with a gain.
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.
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 Biyi Cheng, Head of Dealing at City Index Australia. "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."
CFDs can also be 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 - as an example - that you hold AU$5,000 worth of ANZ bank shares in your portfolio. You can short sell the equivalent of AU$5,000 worth of shares through a CFD trade.
Should ANZ bank 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.
Trading CFDs on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment. You must ensure you fully understand the risks. You don't, or may not own the underlying asset.
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