4.

Use CFD Trading To Hedge Your Share Portfolio

A hedge is an investment option that is opened so as to offset potential losses of another
investment. In short, it is a method of minimizing or protecting an investment from
extreme losses.

CFDs provide an excellent opportunity to hedge an existing investment because of the fact
that you can make money when the price of an instrument decreases.

If we can explain this better, if you are trading a stock, you can only make money if its price
increases. If it decreases, you only lose money.

With CFDs, however, you can make money by speculating on either the increase or
decrease on an instrument’s value.

Let’s see how hedging would work in real life.

So, let’s say that you have bought 100 shares of the Apple stock at $300 per share. Of
course, you anticipate that the price of the share will go upwards so that you can make
money off the difference.

Unfortunately, while you are still holding the shares, an error is reported on the latest
iPhone and the value of the stock suddenly falls to $250 per share. Your investment will
now be worth less than you bought it (-$5,000).

Rather than sell your shares and lose the $500, you can initiate a Sell position on the Apple
share using a CFD trader. In this way, if the stock continues to lose its value, you will be
making money even as your earlier investment keeps losing.
So, you can hedge to balance your portfolio (get your investment back).

Now, let’s say that you opened position a sell position when the stock decreased to $250
(total $5,000 loss).

To balance your portfolio, you can initiate the trade using a CFD contract size that will give
you back the $5,000 when the stock slides by another $50 (see Section 4 to understand
contract sizes).

The concept here is that as the stock losses more value and your investment
decreases, the CFD sell trade will be making more profits.

So, when the stock will be worth $200, you will have lost a total of $10,000. However, you
will have set your CFD Apple Sell trade contract size to give you $10,000 when the stock
reaches $200.

As such, you will have lost $10,000 on the Apple share but earned $10,000 on the Apple
CFD trade.

If you closed both trades now, you will have lost nothing since your initial investment will
be back. This is why hedging is known as a loss offsetting method.