Being able to construct a profitable portfolio isn’t easy, as it requires more than just investing in the right assets at the right time. You need to use the right investment vehicles and learn how to create a winning investment strategy that best suits your personality and risk tolerance, as what works for one investor will not necessarily work for you.
If you’ve heard of CFDs and you’re asking yourself “should I use contracts for difference in my investment portfolio?”, there is no straightforward answer, as it mostly depends on you and your trading!
It’s the same when it comes to looking for the best platforms for retail traders. To decide which one is the right one for you, it’s essential first to determine which kind of trader you are and what your trading strategy and financial goals are. With that in mind, you can make a list of your trading and investment needs to select the best trading platform for you.
Let’s now have a look at some of the reasons why you might want to consider CFDs for your investment portfolio.
CFDs, or Contracts for Differences, are financial derivatives replicating the price movements of an underlying asset, such as a Forex currency pair, a commodity, an index, or company shares. When investing in CFDs you do not own the underlying asset. You simply own a contract with your broker to exchange the difference in price between the opening and the closing price of a CFD contract.
While an investment portfolio generally follows a rather mid to long-term strategy, many short-term market movements can be taken advantage of with CFDs. Contracts for Difference are financial products that can be used to trade bullish and bearish price movements, so you can benefit from all market conditions. That’s why trading short-term market movements with CFDs doesn’t have to change your long-term asset allocation, but it can help you better protect these long-term investments.
Let’s say you invested in BHP Group Ltd a few years ago as a long-term investment. At some point, you see the value of the stock price heading down and breaking below a significant support, leading you to believe that the price of the company will keep weakening. However, you still believe that the company is a good buy over the long run. To hedge your bullish long-term investment in BHP Group Ltd against further short-term price weakness, you can use CFDs to short sell the share of the company to offset your losses in the physical shares with your gains from CFDs on BHP Group Ltd.
In addition to hedging your share portfolio and taking advantage of rising and falling markets, CFDs can also be used to enable your investment to go further with leverage and margin trading, as you only have to put aside a certain amount of money to get full market exposure and open trading positions.
So, what do you think: are CFDs right for you?