When your shares devalue over time in unstable market, CFDs (Contracts for Difference) provide an opportunity to hedge your investments in order to minimize losses. Here we explain how to protect your shares and start short selling by Contracts for Difference 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.
One increasingly widespread way to ensure your portfolio is not 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.
According to Chief Market Joshua Raymond, Strategist at City Index describes hedging as the classic ice cream van example. He says, "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 not willing to buy ice creams, so sales are likely to be down."
He explains that, "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."
One of best option that CFDs have it is extremely tax efficient, 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.
There are many more benefits that CFD have, 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.