Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this edition of Markets in Focus, we take a closer look at hedging. What does it mean, and how can you effectively use it?
What is Hedging
Hedging is a risk management strategy designed to protect an investment or portfolio from potential losses. It involves taking an existing investment and opening an additional position that offsets the risk associated with the initial investment.
The primary goal of hedging is to minimize or reduce potential losses by establishing a position that moves in the opposite direction of the original investment. Various techniques and financial instruments can be used for hedging, and Contracts for Difference (CFDs) are particularly well-suited for this purpose.
Example of a Hedging Strategy in CFD Trading
Let's look at a specific example of how you can implement a hedging transaction using CFDs:
- You own €10,000 worth of Apple stock in your portfolio.
- You are confident about the company's growth prospects but anticipate a situation that may cause Apple’s stock price to fall.
- To hedge against a potential drop in Apple’s value, you open a short CFD position on Apple for the same €10,000.
- If Apple's stock price indeed falls, you will incur a loss on your €10,000 Apple stock portfolio but make a profit on the short CFD position.
- You will still retain your Apple shares and can benefit from their value increasing if the share price moves up again.
Hedging with Change
Through the Change App, you can trade and hedge not only Apple but also over 350 other margin instruments, available Monday to Friday.
Until next week!
