CFD is a derivative product derived from other existing instruments. Interesting characteristic is the involvement of investor capital that is much smaller, because the CFD using the concept of margin trading. Through the use of this concept, the investor or trader can receive profits or losses by an amount equal to the real stock trading. Only by using a smaller-scale capital.
As a kind of trade that has no assets, CFD requires a derivative contract as well as other products. Involvement to make CFD contracts can be traded with high liquidity and the ability to short sell.
CFD can be used for various functions. In general there are two main objectives in the use of CFD traders. The goal is diversification and hedging existing positions.
A. Diversification
CFD, as it can be used with high leverage, it can also be used to diversify risk. While on the purchase of shares on the stock conventionally, there is usually no element of leverage, so that capital is used (usually purchased) can only buy the amount of its capital stock is worth. With a CFD, you can use leverage to design a portfolio of 10 stocks with the CFD capital employed is equivalent to a single transaction on the stock exchange (10:1 leverage).
For example, with a capital of $ 100,000, you buy 100 shares of A valued at $ 1,000 in the stock market. But with CFD, you can buy 10 different types of shares, each of which amounted to 100 shares with a value per share of $ 1000.
2. Hedging
In this case, CFD offers hedging opportunities are perfect for your stock portfolio. There is a very close relationship both in terms of price and quantity of shares and CFDs. At the time of correction occurs, you need the opposite position to protect the value of the shares and in no way affected by the fluctuations that occur. When the market is having a clear direction of movement, you can then let go of hedging.
There are three main advantages of hedge shares via CFD:
- Capital required is much lower due to the use of leverage in CFD.
- Not subject to tax on capital gains derived from the CFD, while the stock is taxable.
- Unnecessary liquidation of your stock position.
Related Posts