Share prices move both up and down. Investors who hold profitable share portfolios can be faced with the dilemma of how to protect their profits.
Hedging your share portfolio using CFDs is a straightforward way of protecting the underlying asset.
CFDs make it easy to hedge because of the following features:
- Low transaction costs
- Low minimum ticket sizes
- Low margin requirements
- They are available on a large range of instruments
- No expiry dates
- Interest on short positions
- No time decay
Why Hedge?
Hedging is beneficial because a decrease in the price of a physical share can be counter-balanced by taking a short position in a CFD over the same share. This is particularly useful if you have a negative short-term view on the share's price, but have a more positive longer-term view on the share's price, and hence want to hold onto the underlying shares. You also may not want to sell the holdings for Capital Gains Tax reasons if you haven’t held them for longer than 12 months.
By hedging in this manner, you are able to use your capital more efficiently, as to fully hedge your share portfolio with CFDs is a fraction of the cost.
So how does it work? It’s 3 March and you short 10,000 Boart Longyear shares to hedge your long-term position at $2.10. On the 19th March you buy back the CFDs at $1.65 giving you a profit of 45c per share or $4,500. The long-term uptrend has resumed. You have used CFDs to protect your physical position during the fall period (and made a profit), but in the long-term your shares have remained in your portfolio and you can capture further potential gains.
For further information on this strategy, speak to one of our dealers on 1800 601 733.
The above comments do not constitute investment advice and IG Markets accepts no responsibility for any use that may be made of them.
Updated: 28/07/08