To better provide a safeguard mechanism, investors can make us of some fail-safe strategies for traders’ portfolio. Choosing a portfolio based on mere intuition will result in positive returns which can put protective measures raises the presumption of value of shares which can sometimes be unusual.
Perhaps the best way to look at the practice is to view at it like a life-insurance policy wherein traders purchase in case hoping that they will never need to face the fact that the worst could happen.
The recent strong performance of equity markets has resulted in the increase in demand for short and leverage instruments which have been used mainly to gain profit from short-term strong convictions in an environment where in long-term passive return were reportedly been poor.
However, many investors are now looking forward for a change in fortune for stock markets, short exchange traded products or ETPs (the opposite of long-only investments) are being used primarily not only as a means to profit from the failing markets but more importantly to hedge downside on the investor’s portfolios.
The terms hedging, derivatives, and CFDs tend to invoke images of money-hungry city trades as fast buck, yet they can be relatively straightforward and more importantly legitimate. CFDs can be best purchased when the price of the share goes down because this effectively neutralises the position in the share. Should the share goes down, the investor can choose to recoup his losses through the gains made by the CFD, but if it goes up then the profit becomes neutralised and payment option is possible in case it goes down.
This in itself is a simple version of any trade and neutralising one’s position is not the only option available. Alternatively, traders can likewise choose to short their share by double the value if they were fairly certain of the short-term decline in price.
Spread betting on the other hand is a better option which is more appreciated when trading short term. Many investors would want to prefer using spread betting as gains are precluded from capital gains tax under the gaming laws. The disadvantage on the other hand is that since investors are not obliged to pay taxes and in the instance they lose their bet, they can no longer claim their tax back.
Spread betting is more or less a gamble on a price market which makes it much more simpler in some ways but is more passive on the market. Moreover, spread betting has no impact on the performance of the market they are betting on. Furthermore, this is not a comparable means to trade in a CFD, where a market movement is an unavoidable part of the entire process since in the sale, someone else would have to purchase it eventually.